Final answer:
The value of a strip bond with a face value of $1000 due in 11 years with a yield to maturity of 9.9% is calculated to be $355.61 using the present value formula for a zero-coupon bond.
Step-by-step explanation:
The value of a strip bond with a face value of $1000 due in 11 years with a yield to maturity of 9.9% can be calculated by using the present value formula for a zero-coupon bond, which is essentially what a strip bond is. The formula to calculate the present value (or price) of the strip bond is:
PV = F / (1 + i)^n
Where PV is the present value of the strip bond, F is the face value, i is the yield to maturity (expressed as a decimal), and n is the number of years until maturity. Plugging the values into the formula:
PV = $1000 / (1 + 0.099)^11
Therefore, the value of the strip bond is:
PV = $1000 / (1.099)^11
PV = $1000 / 2.813
PV = $355.61
The bond's value of $355.61 represents the current price an investor would be willing to pay for this bond today, considering it will mature to its $1000 face value in 11 years with the given yield to maturity of 9.9%.