What was the issue price of a 25-year strip bond with a face value of $50,000 and a discount rate of 7% compounded semi-annually?
A) $8,953
B) $9,212
C) $11,318
D) $11,834
E) $11,997

Question

Quizplus · Accepted Answer

The issue price of a strip bond is the present value of the future cash flows, which are the semi-annual coupon payments and the face value at maturity. The present value of a future cash flow is calculated as the cash flow divided by (1 + r)^n, where r is the discount rate and n is the number of periods. In this case, the discount rate is 7% compounded semi-annually, so r = 0.07/2 = 0.035. The number of periods is 25 years * 2 semi-annual periods per year = 50 periods. The face value is $50,000. The semi-annual coupon payment is $50,000 * 0.07 / 2 = $1,750. The present value of the future cash flows is:PV = $1,750 / (1 + 0.035)^1 + $1,750 / (1 + 0.035)^2 + ... + $1,750 / (1 + 0.035)^50 + $50,000 / (1 + 0.035)^50= $8,953.02Therefore, the issue price of the strip bond is $8,953.02.

What Was the Issue Price of a 25-Year Strip Bond