3. Valuing semiannual coupon bonds Bonds often pay a coupon twice a year. For th

Question

3. 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. 1 In Assume that a $1,000,000 par value, semiannual coupon U.S. Treasury note with two years to maturity coupon rate of 3%. The yield to maturity of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: (YTM) has a O $552,839.17 $877,522.49 O $745,894.12 O $1,053,026.99 Based on your calculations and understanding of semiannual coupon bonds, complete the following statements: . Assuming that interest rates remain constant, the T-note's price is expected to . The T-note described is selling at a . When valuing a semiannual coupon bond, the time period variable (N) used to calculate the price periods remaining in the bond's life of a bond reflects the number of

Explanation / Answer

Given:

Par value = 1,000,000

Coupon rate = 3% = 3/2 = 1.5%

YTM = 9.9% = 9.9/2 = 4.95%

Maturity Period = 2 Years = 4years

Semiannual coupon = 1,000,000*1.5% =15,000

P = 15000/(1.0495)^1+15000/(1.0495)^2+15000/(1.0495)^3+1015000/(1.0495)^4

=14292.52+ 13617.79+12975.78+836,630.40

=877,516.49 close to 877,522.49 in the option.

Second option is the correct answer.

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