posted by joe .
You work for an underwriter. The underwriter asks you to ¡§strip¡¨ a portfolio of treasury bond. The treasury bonds in question are all identical, they have 5 years to maturity, pay an annual coupon of 7.25% per year, payable annually, and they are currently selling at face, at $ 100 million.
The strips you intend to issue are not the standard interest only (IO) and principal only (PI) strips, but rather different.
Both strips mature in 5 years as well. Each strip has a face of 50 MM. The coupons on both strips depends on an appropriately chosen index of general interest rates.