Final answer:
The price of a Treasury STRIPS with a face value of $100 and a yield to maturity of 6.80 percent maturing in 5 years is calculated by discounting the face value using the yield to maturity as the discount rate to find its present value.
Step-by-step explanation:
To determine the price of a Treasury STRIPS with a face value of $100 that matures in 5 years and has a yield to maturity of 6.80 percent, we need to calculate the present value of the bond. A Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) is a type of bond that pays no interest until maturity, at which point it pays its face value. The price of such a bond is the present value of its face value, calculated using the yield to maturity as the discount rate.
The present value formula is:
PV = F / (1 + r)^n
Where PV is the present value, F is the future value or face value, r is the yield to maturity, and n is the number of years to maturity. Substituting the given values, we get:
PV = $100 / (1 + 0.068)^5
Calculating the above gives us the present value of the Treasury STRIPS, which is the current price an investor would pay for the bond.