S99NOONQ2.1

1.Use this STRIP table to price a 6% coupon bond with semi-annual coupons and one year to maturity. The next coupon is due in October 1999. (2 pts)

First figure out the cash flows from the bond. A 6% coupon bond pays 6% of its par value (assumed to be $1000 when it’s not mentioned) every year. The semi-annual payments mean that the $60 is split-up and paid in $30 installments every 6 months. Thus, the cash flows are:

Oct 99	April 2000
30	1030

The STRIP table tells us that we can get $100 in Oct 99 for $97 16/32 ($97.50) today, which means that the value today of $1 in Oct99 is $0.9750. Therefore, the $30 we're going to get in Oct 99 is worth $30(0.9750)=$29.25 today. $100 in April 2000 is selling for $95 4/32 ($95.125) today. Thus, the $1030 we will receive in April 2000 is worth $1030(0.95125)=$979.79 today. The total value of the cash flows of the bond is the bond's price: $29.25+$979.79=$1009.04.

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