Asked by Myisha Garfield on May 16, 2024
Verified
Should we conclude that the owner of a strip bond earns nothing until the full face value is received at maturity? Explain.
Strip Bond
A financial instrument representing a portion of a debt security without periodic interest payments, where the investor receives the face value at maturity.
Maturity
The time when a financial instrument, such as a bond or loan, reaches its due date and is to be paid off.
- Apply the principle of time value of money to measure the effectiveness of payment streams and investment performances.
- Determine the economic equivalence of different payment schedules under varying interest rates.
Verified Answer
HH
Henry HuangMay 17, 2024
Final Answer :
We should not reach this conclusion. It is true that the strip bond owner does not receive any payments from year to year. However, the market value of the bond increases as the time remaining until maturity decreases. This year-to-year change in market value is the owner's return on investment. The investor can choose to capture the increased value at any time by selling the bond.
Learning Objectives
- Apply the principle of time value of money to measure the effectiveness of payment streams and investment performances.
- Determine the economic equivalence of different payment schedules under varying interest rates.