W998AMQ2.1
1. Use the following STRIP table to figure the price of a 1 year 8% coupon bond with semi-annual payments. The next coupon is due in August 1999. (3 pts)
| Maturity of STRIP | Bid Price | Ask Price |
| August 1999 | 95:00 | 95:02 |
| February 2000 | 90:06 | 90:08 |
| August 2000 | 85:13 | 85:16 |
| February 2001 | 80:20 | 80:24 |
Since 8% semi-annual coupons means $80 per year (8% of $1000) paid as $40 every 6 months, the cash flows look like this:
August 1999
February 2000
40
1040
So the you need the discount rates for Aug 99 and Feb 00, which you can get from the STRIP prices. Using the ask price as we did in class, 95:02 means 95 and 2/32 of a dollar, or $95.0625 today for $100 in Aug 99. Similarly, 90:08 means $90.25 today for $100 in February 2000. These two prices for $100 to be delivered at a later date imply that the price per dollar for money in August is $0.950625 and the price per dollar for money in Feb. 2000 is $0.9025. That means that the bond should be selling for 40(0.950625) + 1040(0.9025) = $976.625