Answer:
Value of treasury Note =$ 746,617.36
Explanation:
<em>The value of the notes is the present value of future cash flow discounted at its YTM of 11%. The value of the Note is the present value of the future cash receipts expected from the it.</em>
The value is equal to present values of interest payment and the redemption value (RV).
Value of Notes = PV of interest + PV of RV
The value of Note can be worked out as follows:
Step 1
Calculate the PV of Interest payment
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= $15000 .
Semi-annual interest yield = 11%/2 =5.5%
PV = 15,000 × (1 - (1.055)^(-3×2)/0.055) =
Step 2
PV of redemption Value
PV of RV = RV × (1+r)^(-n)
= 1,000,000 × (1.055)^(-4× 2)
= 651,598.87
Step 3
Calculate Value of the Notes
= 95,018.49 + 651,598.87
= $ 746,617.36
Value of treasury Note =$ 746,617.36
