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 $4,000,000 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 7.60%. Using this information and ignoring the other costs involved, the value of the Treasury note is   .

a) 2,214,177.47

b) 2,987,382.30

c) 3,514,567.41

d) $4,217,480.89

The T-note described is currently selling at a   . Assuming that interest rates remain constant over the life of the note, its price should be expected to   as the T-note approaches maturity . When valuing a semiannual coupon bond, the time period (N) in the present value formula is assumed to have a value of   periods. a) premium/ discount b) increase, decrease c) annual, 12 month, 6 month, 4 month

Answer 1

Value of the Treasury Note

· The Treasury Note Present Value of the Coupon Payments plus the Present Value of the Face Value/Par Value.

· The Price of the Treasury Note is normally calculated either by using EXCEL Functions or by using Financial Calculator.

· Here, the calculation of the Treasury Note using financial calculator is as follows

Variables	Financial Calculator Keys	Figures
Par Value/Face Value of the Treasury Note [$4,000,000]	FV	4,000,000
Coupon Amount [$4,000,000 x 3.00% x ½]	PMT	60,000
Market Interest Rate or Yield to maturity on the Bond [7.60% x ½]	1/Y	3.80
Maturity Period/Time to Maturity [3 Years x 2]	N	6
Treasury Note Price	PV	?

Here, we need to set the above key variables into the financial calculator to find out the Price of the Bond. After entering the above keys in the financial calculator, we get the value of the Treasury Note (PV) = $3,514,567.41.

“Hence, the value of the Treasury Note will be $3,514,567.41”

The T-note described is currently selling at a “DISCOUNT”. Assuming that interest rates remain constant over the life of the note, its price should be expected to “INCREASE” as the T-note approaches maturity.

When valuing a semiannual coupon bond, the time period (N) in the present value formula is assumed to have a value of “6-Month” periods.