A $100 000 face value strip bond has 6 years remaining until maturity. If the current market return rate is 4% compounded semi-annually, what is the fair market value of the strip bond?
A) $78 849
B) $79 031
C) $88 797
D) $100 000
E) $126 824

Question

Quizplus · Accepted Answer

The fair market value of a strip bond is calculated using the formula for the present value of a single future amount: $PV = FV / (1 + r)^n$, where PV is the present value (fair market value of the bond), FV is the future value ($100,000), r is the interest rate per period (4% annual rate compounded semi-annually means 2% or 0.02 per period), and n is the total number of periods (6 years with semi-annual compounding means 12 periods). Plugging in the values: $PV = 100,000 / (1 + 0.02)^{12}$, which calculates to approximately $78,849.

A $100 000 Face Value Strip Bond Has 6 Years