A $25,000 face value STRIPS is currently quoted at 27.25 and has 10 years to maturity. What is the yield-to-maturity?
A)6.26%
B)6.72%
C)12.25%
D)13.43%
E)13.88%

Question

Quizplus · Accepted Answer

First, we need to calculate the price of the STRIPS, based on the quoted price. 
Price of STRIPS = Quoted price × Face value ÷ 100 
Price of STRIPS = 27.25 × $25,000 ÷ 100 
Price of STRIPS = $6,812.50

Next, we can use the Price-Yield formula to calculate the yield-to-maturity. 
Price of STRIPS = ($25,000 ÷ (1 + Y)¹⁰) 
$6,812.50 = ($25,000 ÷ (1 + Y)¹⁰) 
(1 + Y)¹⁰ = $25,000 ÷ $6,812.50 
(1 + Y)¹⁰ = 3.6667 
1 + Y = (3.6667)^(1/10) 
1 + Y = 1.1336 
Y = 1.1336 - 1 
Y = 0.1336 
Yield-to-maturity = 13.43%

Therefore, the answer is D) 13.43%.

A $25,000 Face Value STRIPS Is Currently Quoted at 27