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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 four years to maturity has a coupon rate of 3%. The yield to maturity (YTM) of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:

a. $895,940.83
b. $634,624.76
c. $746,617.36
d. $470,368.94

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:_______

Respuesta :

Answer and Explanation:

The computation of the value of the treasury note is shown below:

Given that

NPER = 4 × 2 = 8

RATE = 11% ÷ 2 = 5.5%

PMT = $1,000,000 × 3% ÷ 2 = $15,000

FV = $1,000,000

The formula is shown below:;

= -PV(RATE;NPER;PMT;FV)

AFter applying the above formula, the value of the treausry note is $746,617.36

Here the T-Note should be sold at discount as it is less than the par value

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