If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows)you could
A)profit by buying the stripped cash flows and reconstituting the bond.
B)not profit by buying the stripped cash flows and reconstituting the bond.
C)profit by buying the bond and creating STRIPS.
D)B and C
E)none of the above

Question

Quizplus · Accepted Answer

If the value of a Treasury bond was higher than the value of the sum of its parts (STRIPPED cash flows), it means that the bond is trading at a premium. In this case, an investor could profit by buying the stripped cash flows and reconstituting the bond because the total value of the cash flows would be less than the market value of the bond. This process is called stripping, and it allows investors to create zero-coupon bonds from coupon bonds. By stripping the bond, an investor can buy the cash flows at a discount and reconstitute the bond to sell it at a profit. Therefore, choice A is the correct answer.

If the Value of a Treasury Bond Was Higher Than