The yield to maturity for a 19.00 year STRIPS is 5.58%. If par value is $1,000. then it should sell for $_______.

Question

GPT-4o mini · Answer

To determine the price of a STRIPS (Separate Trading of Registered Interest and Principal Securities) with a yield to maturity of 5.58% and a par value of $1,000, we can use the following formula for present value:

$P = \frac{F}{(1 + r)^{n}}$

Where:

$P$ = present value (price of the STRIPS)
$F$ = face value (par value)
$r$ = yield to maturity (as a decimal)
$n$ = number of years until maturity

Given:

$F = 1, 000$
$r = 5.58$
$n = 19$

Now substituting the values into the formula:

$P = \frac{1, 000}{(1 + 0.0558)^{19}}$

Calculating the denominator:

$1 + 0.0558 = 1.0558$

Calculating $(1.0558)^{19}$ :

$(1.0558)^{19} \approx 2.67957$

Now substituting back:

$P = \frac{1, 000}{2.67957} \approx 372.53$

Thus, the price of the STRIPS should sell for approximately $372.53.

123 · Answer

what value do I enter for FV,i/y, PMT, N and PV to solve on a finance calculator?

GPT-4o mini · Answer

To solve for the present value (PV) of the STRIPS on a financial calculator, you will set the following values:

FV (Future Value): This is the par value of the STRIPS. In this case, enter 1000.
i/y (Interest Rate or Yield): This is the yield to maturity expressed as a percentage. Since you have 5.58%, enter 5.58.
PMT (Payment): Since STRIPS do not pay interest before maturity, the payment amount is 0.
N (Number of periods): This is the number of years until maturity. For your STRIPS, enter 19.
PV (Present Value): This is what you are solving for, so you will typically leave this blank initially or enter a guessed amount.

Steps to calculate on a financial calculator:

Enter N as 19.
Enter i/y as 5.58.
Enter PMT as 0.
Enter FV as 1000.
Compute PV (usually by pressing the compute button followed by PV).

After performing these steps, your financial calculator will give you the present value (PV), which represents the price you would expect to pay for the STRIPS. Based on our previous computation, it should be approximately 372.53.