Example 1: Pricing with STRIPs

 Use the following STRIP prices and interest rate to compute the price
of a July 2021 (maturity) $1000 par, 5% coupon Treasury bond (with
semi-annual payments). Assume that the there are exactly 1.5 years
until maturity and that the next semi-annual payment is in July 2020.
The interest rate below is quoted as a semi-annually compounded
APR.

Maturity Price Rate

July 20 98.75
January 21 3%
July 21 95.25

1
𝑃 0.9875 · 25 · 25 0.9525 · 1,025 1,025.27
1.015
1
 Example 2: Bond Issue
You’re an investment banker specializing in helping
corporations issue bonds. A client firm wants to issue a five-year
semi-annual coupon bond that has been rated BBB by S&P.
Currently, the average BBB bond has a credit spread of 250
basis points. The yield to maturity of five-year Treasury semi-
annual coupon bonds is currently 0.7%.

If you price these bonds at par, estimate the rate at which you
would have to set the coupon.

Bond YTM = 2.5% + 0.7% = 3.2%

To be priced at par, coupon rate = YTM: Coupon rate = 3.2%