Answer:
A = $698,494.97 is the right answer.
And Assuming that interest rates remain constant, the T-note’s price is expected to Increase.
Explanation:
A. $698,494.97
B. $593,720.72
C. $838,193.96
D. $440,051.83
Solution:
First we need to see which among the four options is the correct value.
For that we need to find the rate:
Rate = Yield to Maturity/2
Yield to Maturity = 11%
So,
Rate = 11/2
Rate = 5.5%
Now, we need to find the Nper ( Number of periods for the loan)
Nper = 5 x 2 = 10 years.
Nper = 10 years
Now, we need to find PMT which is a financial function used to calculate the amount to be paid for the loan based on constant payments and interest.
PMT = (3%/2) x par value
PMT = (3%/2)x 1,000,000
PMT = 15000
Now, For future value, we have par value.
So,
Par Value = Future Value = FV = 1,000,000
Now, we have to find the PV = Present Value or the price of the bond.
For this we need to use PV function on excel.
Formula:
Price = - PV(Rate, Nper, PMT, FV)
Plugging the values in Excel like this and we get:
Price = -PV (5.5%,10,15000,1000000)
Price = $698,494.97
Hence, A = $698,494.97 is the right answer.
And Assuming that interest rates remain constant, the T-note’s price is expected to Increase.
