Final answer:
To find the price of the $1000 face value strip bond with a 5.9% market rate of return compounded semiannually and 19 years to maturity, use the present value formula for zero-coupon bonds. The price is determined by discounting the face value using the formula: PV = F / (1 + r/n)^(nt). After calculation, this formula yields the current price of the strip bond.
Step-by-step explanation:
The subject of this question is the computation of the present value of a strip bond in the field of Mathematics, specifically in financial mathematics which is commonly studied in College. To calculate the price of a $1000 face value strip bond with 19 years remaining until maturity, given a market rate of return of 5.9% compounded semiannually, we use the present value formula for a zero-coupon bond:
PV = F / (1 + r/n)^(nt)
Where:
- PV is the present value of the bond (price we are calculating)
- F is the face value of the bond ($1000)
- r is the annual market rate of return (5.9%, or 0.059)
- n is the number of times the interest is compounded per year (2 for semiannual)
- t is the number of years until maturity (19)
Plugging the numbers in, we get:
PV = $1000 / (1 + 0.059/2)^(2*19)
After calculating the denominator's value and carrying out the division, we obtain the present value (price) of the strip bond. Since interest rates impact bond prices inversely, the price of the bond will be less than its face value if market interest rates are higher than the bond's rate at issuance, and vice versa. The given excerpts assist in understanding this concept but are not directly used in the calculation.