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Thread: Calculate the price of strip bonds

  1. #1
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    Calculate the price of strip bonds

    A $8000 face value strip bond has 19 years remaining until maturity.

    a) What is its price if the market rate of return on such bonds is 6.7% compounded semiannually?
    (Do not round intermediate calculations and round your final answer to 2 decimal places.)

    Current Price=2287.13

    b) At this market rate of return, what will be the increase in the value of the strip bond during the fifth year of ownership? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

    The Increase in volume=
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  2. #2
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    Re: Calculate the price of strip bonds

    a)
    what amount invested today at a rate of 6.7/2 = 3.35%
    per period for 19*2 = 38 periods will accumulate to 8000?

    b)
    u = future value after 10 periods (5 years)
    v = future value after 8 periods (4 years
    u - v = ?

    Homework not done here.
    If above not enough, show your work so
    we can see where you're stuck.
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  3. #3
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    Re: Calculate the price of strip bonds

    The value of amount A, invested at r% annual interest rate, compounded semi-annually for n years is $V= (1+ r/2)^{2n}A$. You are told here that the annual interest rate is r= 6.7%= 0.067, V= 8000, and n= 19. You need to solve $8000= (1+ 0.0335)^{38}A$ for A. What is $\frac{8000}{1.0335^{38}}$?
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  4. #4
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    Re: Calculate the price of strip bonds

    I got the answer for a) already...
    PV=8000(1+.0335)^-38
    =2287.13

    but I need help with b)
    so ive got it like

    4th Year
    =8000(1+.0335)^-8
    =6146.192231

    5th Year
    =8000(1+.0335)^-10
    =5754.202977

    and then I subtracted the 5th and 4th year
    5754.202977-6146.192231= 391.989254...

    but the answer still comes up wrong. (ive rounded my answer up "391.99")
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  5. #5
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    Re: Calculate the price of strip bonds

    a = 2287.13

    a(1.0335^10) - a(1.0335^8) = 202.798....
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  6. #6
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    Re: Calculate the price of strip bonds

    If you'd rather go your way (PV of 8000), then:
    a = 8000

    a/1.0335^28 - a/1.0335^30 = 202.798....
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