What Is The Price Of A Treasury STRIPS With A Face Value Of

What is the price of a Treasury STRIPS with a face value of $100 that matures in 5 years and has a yield to maturity of 9.0 percent?

Understanding the valuation of Treasury STRIPS is essential for investors and financial analysts, especially in the context of fixed-income securities and bond markets. Treasury STRIPS (Separate Trading of Registered Interest and Principal Securities) are zero-coupon bonds that are created by separating the interest and principal components of Treasury bonds and notes. Their valuation relies heavily on the yield to maturity (YTM) and the time remaining until maturity. This paper aims to explain the process of calculating the price of a Treasury STRIPS, using the given parameters of a face value of $100, a maturity of 5 years, and a YTM of 9%, by demonstrating the relevant formula and applying it step-by-step.

Paper For Above instruction

Valuation of Treasury STRIPS involves discounting its face value, which is its redemption amount at maturity, by the appropriate yield to maturity over the remaining years until maturity. The fundamental principle is that the present value (PV) of a zero-coupon bond equals the future value (FV) divided by (1 + YTM) raised to the power of the number of periods (years, in this case). The general formula for pricing a Treasury STRIPS is:

Price = Face value / (1 + YTM)^{n}

where:

  • Face value is the amount payable at maturity (here, $100)
  • YTM is the annual yield to maturity expressed as a decimal (here, 0.09)
  • n is the number of years to maturity (here, 5)

Applying these values to the formula:

Price = 100 / (1 + 0.09)^5

First, calculate (1 + 0.09)^5:

1.09^5 ≈ 1.09 × 1.09 × 1.09 × 1.09 × 1.09 ≈ 1.53862

Next, divide the face value by this amount:

Price ≈ 100 / 1.53862 ≈ 65.03

Therefore, the price of the Treasury STRIPS with a face value of $100, 5 years to maturity, and a YTM of 9% is approximately $65.03.

This calculation exemplifies how bond pricing models operate for zero-coupon securities, emphasizing the importance of the present value concept in finance. Investors can utilize this approach to assess the fair value of similar instruments, make informed investment decisions, or evaluate the interest rate environment based on market yields.

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