What was the issue price of a 25-year strip bond with a face value of $50,000 and a discount rate of 7% compounded semi-annually?
A) $8,953
B) $9,212
C) $11,318
D) $11,834
E) $11,997

Question

Quizplus · Accepted Answer

The correct answer is A because the issue price of a strip bond is equal to the present value of its future cash flows. In this case, the future cash flows are the semi-annual interest payments of $1,750 and the face value of $50,000 at maturity. Using the formula for the present value of an annuity, we can calculate the issue price as follows:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present valuePMT is the semi-annual interest paymentr is the semi-annual discount raten is the number of semi-annual periodsPlugging in the values, we get:PV = $1,750 * [1 - (1 + 0.07/2)^-(25*2)] / (0.07/2)= $1,750 * [1 - (1.035)^-50] / 0.035= $1,750 * 18.424= $32,242Therefore, the issue price of the strip bond is $32,242.

What Was the Issue Price of a 25-Year Strip Bond