Question

What is the remaining time until the maturity date of a $10,000 strip bond if it is purchased for $4,011.33 to yield 6.4% compounded semiannually until maturity?

A. 3 years
B. 4 years
C. 5 years
D. 6 years

Answer 1

To calculate the remaining time until the maturity date of a strip bond, you would use the formula for compound interest.

Step-by-step explanation:

To calculate the remaining time until the maturity date of a strip bond, we can use the formula for compound interest:

Principal x (1 + interest rate / number of periods)^(number of periods x time) = Current value

In this case, the principal is $10,000, the interest rate is 6.4% (or 0.064), and the periods are semiannual. We need to solve for time. Rearranging the formula:

Time = log(Current value / Principal) / (number of periods x log(1 + interest rate / number of periods))

Plugging in the values:

Time = log(4,011.33 / 10,000) / (2 x log(1 + 0.064 / 2))

Calculating this will give us the remaining time until the maturity date, which is approximately 5 years. Therefore, the correct answer is C. 5 years.