Question

Verify the May 23, 2016, asked the yield of 1.09 percent on the Treasury bond, stripped principal STRIPS maturing August 2019. Use a one-day settlement period from the date of purchase (i.e., ownership occurs on Wednesday, May 24, 2016). The STRIPS matures on August 15, 2019.

Answer 1

Introduction:

Financial market is the market where financial instruments are purchased and sold. Financial market is referred as spot or cash market when the asset is delivered immediately. Financial Market has been categorised as money market and capital market. Money market is the market where short term financial instruments are traded. Short term here means maturity period of instrument is less than one year.

a.

Computation of asked yield:

STRIP bond matures on August 15, 2019 and the date of ownership is May 24, 2016. The ask price on STRIP is 96.553%. The asked yield will be computed as follows:

Hence, the asked yield will be

Note: The number of days from May 24, 2016 to May 24, 2019 will be three years and the number of years from May 24 to August 15, 2019 will be taken as 0.2246 by dividing 82 days with 365. Total number of years will be 3.2246.

Intermediate calculation:

b.

Computation of asked price:

STRIP bond matures on November 30, 2016 and the date of ownership is May 24, 2016. The ask yield is 0.56%. The face value of STRIP is 100%. The asked price will be computed as follows:

Hence, the asked price will be

Note: The value of 1.0028 to the power 1.0356 will be 1.0029. The number of days from May 24, 2016 to November 30, 2016 will be taken as 0.5178 by dividing 189 days with 365.