Reference no: EM132531886
Valuing semiannual coupon bonds
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.
Question 1: 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____________.
Based on your calculations and understanding of semiannual coupon bonds, complete the following statements:
Question 2: The T-note described is currently selling at a________(premium or discount?). Assuming that interest rates remain constant over the life of the note, its price should be expected to________(increase or decrease?) 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__________(4, 12, 6, or annual)periods.
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