Calculate the price of strip bonds

Oct 2017
3
0
Manitoba
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=
 
Feb 2015
2,255
510
Ottawa Ontario
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.
 

HallsofIvy

MHF Helper
Apr 2005
20,249
7,909
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 $\frac{8000}{1.0335^{38}}$?
 
Oct 2017
3
0
Manitoba
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")
 
Feb 2015
2,255
510
Ottawa Ontario
a = 2287.13

a(1.0335^10) - a(1.0335^8) = 202.798....
 
Feb 2015
2,255
510
Ottawa Ontario
If you'd rather go your way (PV of 8000), then:
a = 8000

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