Bonds often pay a coupon twice a year. For the valuation of bonds that make semi
ID: 2743852 • Letter: B
Question
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 51,000,000 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 7.70%. Using this information and ignoring the other costs involved, calculate the value of the Treasury 5876, 205.93 51, 051, 447.12 5552,009.74 5744, 775.04 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 of a bond reflects the number of periods remaining in the bond's life.Explanation / Answer
Rate = 0.03/2 (Semi annual) = 0.015
YTM = 0.077/2 = 0.0385
Coupon = 0.015*1000000 = 15000
Correct answer - A
1.
when interest rates are not changed T-bond's rate decreases with time.
2. The T-note is selling at discount, because the price is less than par value
3. It reflects the number of coupon payment period remaining in the bond's life.
Rate 0.0385 Year (n) Cashflow (x) Discount rate = 1/(1+0.0385)^n Present Value = x*discount rate 1 15000 0.9629273 14443.90948 2 15000 0.92722898 13908.43475 3 15000 0.8928541 13392.8115 4 15000 0.85975359 12896.30381 5 15000 0.8278802 12418.20299 6 1015000 0.79718844 809146.271 Present value 876205.9336