423.5
5.Explain why STRIP prices can be used to price U.S. government bonds. (5)
STRIPS are created by "stripping" each of the individual cash flows from U.S. government bonds off and selling them individually. STRIP prices then tell us the value today of a $100 cash flow from the government on a particular date. Since two cash flows from the government on the same date can’t have a different prices today (can’t have different present values), we can use the price of a STRIP to figure-out the price per dollar for any amount of money to be received on that date. By doing this for each of the cash flow dates for the bond, we can price the bond.