Bonds often pay a coupon twice a year. For the valuation ofbonds that make semiannual payments, the number of periods doubles,whereas the amount of cash flow decreases by half. Using the valuesof cash flows and number of periods, the valuation model isadjusted accordingly.
Assume that a $1,000,000 par value, semiannual coupon U.S.Treasury note with two years to maturity has a coupon rate of 3%.The yield to maturity (YTM) of the bond is 11.00%. Using thisinformation and ignoring the other costs involved, calculate thevalue of the Treasury note:
$859,794.00
$730,824.90
$541,670.22
$1,031,752.80
Based on your calculations and understanding of semiannualcoupon bonds, complete the following statements: • Assuming thatinterest rates remain constant, the T-note’s price is expectedto_______ .
• The T-note described is selling at a_________.
• When valuing a semiannual coupon bond, the time periodvariable (N) used to calculate the price of a bond reflects thenumber of_________ periods remaining in the bond’s life.
