312.1
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 2019. (3 pts)
| Maturity of STRIP | Bid Price | Ask Price |
| August 2019 | 95.00 | 95.06 |
| February 2020 | 90.15 | 90.25 |
| August 2020 | 85.13 | 85.26 |
| February 2021 | 80.20 | 80.44 |
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 2019
February 2020
40
1040
So the you need the discount rates for Aug 19 and Feb 20, which you can get from the STRIP prices. Using the ask price as we did in class, 95.06 means $95.06 today for $100 in Aug 19. Similarly, $90.25 today for $100 in February 20. These two prices for $100 to be delivered at a later date imply that the price per dollar for money in August 2019 is $0.9506 and the price per dollar for money in Feb. 2000 is $0.9025. That means that the bond should be selling for 40(0.9506) + 1040(0.9025) = $976.62