Assume that a $1,00,000 par value, semiannual coupon U.S. Treasury note with fiv

Question

Assume that a $1,00,000 par value, semiannual coupon U.S. Treasury note with five years to maturity (YTM) has a coupon rate of 5%. The yield to maturity of the bond is 11.00%. Using ths information and ignoring the other costs involved, the value of the T-note is calculated as $773,871.23

Based on this calculation and an understanding of semiannual coupon bonds, complete the following statements:

1. Assuming the interest rates remain constant, the T-notes price is expected to _____________. (Increase or Decrease) Please Explain Why.

2. The T-note described is selling at a ________________. (Premium or Discount)   Please Explain Why.

3. When valuing a semiannual coupon bond, the time period N in the present value formula used to calculate the price of the bond is treated in terms of ____________ periods. (Annual, 6 month, 4 month, 12 month)

Explanation / Answer

Increase; as a bond gets closer to maturity it moves toward its par value because that's the amount that will actually be paid out at maturity. Discount because it is currently selling below it's par value. Six month periods because that's how often interest is paid.

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