52-1

52.1

1.Use this STRIP table to price a 7% coupon bond with semi-annual coupons and one and a half years to maturity. The next coupon is due in August 2020 and it is now Feb 2020. (2 pts)

  1. STRIP

    Ask
    May 2020

    98.12
    Aug 2020

    96.94
    Feb 2021

    93.95
    May 2021

    92.04
    Aug 2021

    90.50
    Feb 2022

    87.20

    First convert the description of the bond into a cashflow diagram. 7% coupon means that 7% of par value (remember par is always $1000 unless stated otherwise) is paid out annually. Semi-annual coupons mean that the $70 (=7% of $1000) is paid in 2 equal installments at 6 month intervals. 1.5 years to maturity means that coupon payments continue for 1.5 more years at which point the par value is returned and the bond ceases to exist.

    Feb 2020 August 2020 Feb 2021 August 2021
    0 35 35 1035

    Now we have to value these cashflows. The STRIP table will help us do this. The STRIP table tells us that $100 received in Aug 2020 is worth 96.94 today, or $1 in 8/20 is worth $0.9694 today. Thus, $35 in 8/20 is worth $35(0.9694)=$33.93 today.

    The STRIP values for the other dates are $93.95 and $90.50. Following the same procedure, we get values of $32.8125 and $936.765 for the last 2 cashflows.

    The total present value of the package of cashflows (and, thus, the price of the bond) is $33.93+32.8125+936.675=$1003.42

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