Attempts: 6. Valuing semiannual coupon bonds Bonds often pay a coupon twice a ye

Question

Attempts: 6. 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 that a $1,000,000 par value, semiannual coupon U.S. Treasury note with three years to maturity (YTM) has a 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: O $989,529.92 O $700,917.03 O $824,608.27 O $519,503.21 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: T-note described in this problem is selling at a

Explanation / Answer

Bond Valuation: The value of bond is the present value of the expected cashflows from the bond,discounted at Yield to Maturity(YTM).

Current Market Price of Bonds = $824,608.27 (76257.27+748351)

Note : Since the bond makes semiannual interest payments, total no. of period is 6 (3*2), cashflow per period is 15,000(1000000*3%/2) and cashflows are discounted at 4.95% (9.9/2).

*PVAF = (1-(1+r)-n)/r = (1-1.0495-6) / .0495= 5.083818

**PVF = 1 / (1+r)n = 1 / 1.0495-6 = 0.748351

Since the Yield to maturity(9.9%) is higher than the coupon rate(3%) , the bond will trade at discount.

Year Cash flow PVAF/PVF@4.95% Present Value (Cashflow*PVAF/PVF) 1-6 15,000 5.083818* 76257.27 6 1,000,000 0.748351** 748351.00

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.