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natita [175]
3 years ago
13

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 U.S. Treasury note with five years to maturity (YTM) has a coupon rate of 3%. The yield to maturity of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note:
Business
1 answer:
Ostrovityanka [42]3 years ago
6 0

Answer:

Value of treasury Note =$698,494.97

Explanation:

<em>The value of the notes is the present value of the future cash inflows discounted at its YTM of 11%</em>

Value of Notes = PV of interest + PV of RV  

The value of Note can be worked out as follows:  

Step 1  :<em>Calculate the PV of Interest payment  </em>

Present value of the interest payment  

PV = Interest payment × (1- (1+r)^(-n))/r  

r-Yield to Maturity, n- number of years

Interest payment = 3% × $1,000,000 × 1/2= $15,000 .

Semi-annual interest yield = 11%/2 =5.5%  

PV = 15,000 × (1 - (1.055)^(-5×2)/0.055) = 113,064.3874

<em>Step 2   :PV of redemption Value</em>  

PV of RV = RV × (1+r)^(-n)  

= 1000,000 × (1.055)^(-5×2)  

= 585,430.57

Step 3  

<em>Calculate Value of the Notes </em>

=113,064.3874  + 585,430.57

= $698,494.96

Value of treasury Note =$698,494.97

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