422.1
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 2019. (2 pts)
| October 2019 | 97.50 |
| April 2020 | 95.13 |
| October 2020 | 92.08 |
| April 2021 | 89.24 |
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 19
April 2020
30
1030
The STRIP table tells us that we can get $100 in Oct 19 $97.50 today, which means that the value today of $1 in Oct19 is $0.9750. Therefore, the $30 we're going to get in Oct 19 is worth $30(0.9750)=$29.25 today. $100 in April 2020 is selling for $95.13 today. Thus, the $1030 we will receive in April 2020 is worth $1030(0.9513)=$979.84 today. The total value of the cash flows of the bond is the bond's price: $29.25+$979.84=$1009.09.