You buy a principal STRIP maturing in five years. The price quote per hundred of par for the STRIP is 75.75 percent. Using semiannual compounding,what is the promised yield to maturity on the STRIP?

Question

Quizplus · Accepted Answer

The promised yield to maturity (YTM) on a STRIP can be calculated using the formula for the present value of a single future cash flow, which is the face value of the STRIP, since a STRIP pays no interest and only pays at maturity. Given a price quote of 75.75 for a $100 face value STRIP maturing in 5 years, the calculation for semiannual compounding involves solving for the interest rate (i) in the equation: $75.75 = \frac{100}{(1 + i)^{10}}$, where 10 represents the 5 years times 2 (for semiannual). Solving this equation for i gives the semiannual yield, which is then doubled to annualize it, resulting in approximately 5.632 percent.

You Buy a Principal STRIP Maturing in Five Years