Question

Back to Assignment Attempts: Keep the Highest: /2 7. 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. Assume that a $1,000,000 par value, semiannual coupon US Treasury note with five years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: O $849,059.88 $1,018,871.86 $534,907.72 $721,700.90 premium Based on your calculations and understanding of se þupon bonds, complete the following statement: discount The T-note described in this problem is selling at a

Answer 1

Coupon = 1,000,000 * 0.06/2 = 30,000

n = 5 * 2 = 10

r = 0.099/2 = 0.0495

FV = 1,000,000

Pn Bond value = 1 FV (1+r) (1+r)

30,000 Bond value = 0.0495 * 1 1,000,000 *(1 + 0.0495) 10 (1+0.0495) 10

Bond value = 606,060.606060606 * 0.3831556789 + 616,844.321107129

Bond value = $849, 059.884076826

Bond value = $849,059.88

The bond is selling a discount because the bond value is less than the par value.

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