Question

What is the effective yield to maturity of a $1,000 par value strip bond that sells for $255 and will mature in 15 years? (Use a Financial calculator to arrive at the answer. Round the final answer to 2 decimal places.)

Answer 1

The effective yield to maturity of a $1,000 par value strip bond that sells for $255 and will mature in 15 years is 10.63%.

Step-by-step explanation:

The effective yield to maturity of a $1,000 par value strip bond that sells for $255 and will mature in 15 years can be calculated using a financial calculator. To calculate the yield to maturity, we need to use the formula: YTM = (Annual Interest Payment + [(Face Value - Purchase Price) / Number of Years]) / Purchase Price.

Using the given information, the annual interest payment is $0 (since it is a strip bond), the face value is $1,000, the purchase price is $255, and the number of years is 15. Therefore, the calculation is as follows:

YTM = (0 + [(1000 - 255) / 15]) / 255 = 0.1063.

Rounding the final answer to 2 decimal places, the effective yield to maturity of the strip bond is 10.63%.