Question

4. Valuing semiannual coupon bonds Bonds often pay a coupon twice a year. For the valuation of bonds that make semiannual payments, the number of periods doubles, whereas the amount of cash flow decreases by half. Using the values of cash flows and number of periods, the valuation model is adjusted accordingly. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with three years to maturity has a coupon rate of 3%. The yield to maturity (YTM) of the bond is 7.70%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $876,205.93 $744,775.04 $1,051,447.12 $552,009.74 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: The T-note described in this problem is selling at a .

Answer 1

T-note described in this problem is selling at a price of $876,205.93

Step-by-step explanation:

The price of the bond can be computed using pv formula in excel as stated thus:

=-pv(rate,nper,pmt,fv)

rate is the semiannual yield which is the annual yield of 7.70% divided by 2

nper is the number of coupons payable by the bond over its three years' tenure given that coupon is paid twice a year i.e 3*2=6

pmt is the semiannual coupon payment=$1,000,000*3%*6/12=$15000

fv is the face value of $1,000,000

=-pv(7.70%/2,6,15000,1000000)=$876,205.93