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

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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 hailf. Using the values of cash fows and number of periods, the valuation model is adjusted accordingly Assume that a $1,000,000 par value, semiannual coupon U.S. Treasury note with three years to maturity (YTM) has a coupon rate of 6%. The yield to maturity of the bond is 11.00%, using tis information and ignoring the other costs involved, calculate the value of the Treasury note: $551,320.40 $743,844.98 $1,050,134.09 $875,111.74 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: Assuming that interest rates remain constant, the T-note's price is expected to ash Playr WIN 270 J4 1 © 2004-2016 Ala, Aa "ights reírved 013 Cengage Leeming et as noted All igt served Grade Iit Now

Explanation / Answer

semiannual period

cash flow

present value of cash flow = cash flow/(1+r)^n r= 11%/2 = 5.5%

1

30000

28436.02

2

30000

26953.57

3

30000

25548.41

4

30000

24216.5

5

30000

22954.03

6

1030000

747003.2

value of bond

sum of present value of cash flow

875111.7

answer is increase as the bond approaches to maturity value of bond will increase

semiannual period

cash flow

present value of cash flow = cash flow/(1+r)^n r= 11%/2 = 5.5%

1

30000

28436.02

2

30000

26953.57

3

30000

25548.41

4

30000

24216.5

5

30000

22954.03

6

1030000

747003.2

value of bond

sum of present value of cash flow

875111.7

answer is increase as the bond approaches to maturity value of bond will increase

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