Question

You want to invest some money today to ensure you have exactly $50 thousand in 6 years to use as the down payment on a house. You are considering an investment in only one of the following bonds: (1) 3% 2-year T-Note; (2) 0% 6-year T-Bond STRIPS; (3) 3% 6-year T-Bond; (4) 5% 6-year T-Bond; (5) 8% 10-year T-Bond. The 6-year T-Bond STRIPS is the investment best suited to meet your objective. True False

Answer 1

Answer:

True

Explanation:

STRIPS are zero coupon bonds, and the advantage of them is that they allow an investor to know exactly how much money they will receive at a future date.

The investor purchases the STRIPS at a discount value, which we are not told here. E.g. assuming that the discount rate is 5% (similar to (4), the price of the STRIPS = $50,000 / (1 + 5%)⁶ = $37,311.