Question

7. 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. Assume that a $1,000,000 par value, semiannual coupon U.S. Treasury note with four years to maturity has a coupon rate of 3%. The yield to maturity (YTM) of the bond is 11.00%. Using this information and ignoring the other costs involved, the value of the Treasury note is ?

Answer 1

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond is calculated using PV function in Excel :

rate =11%/2 (Semiannual YTM of bonds = annual YTM / 2)

nper = 4 * 2 (4 years remaining until maturity with 2 semiannual coupon payments each year)

pmt = 1000000 * 3% / 2 (semiannual coupon payment = face value * coupon rate / 2)

fv = 1000000 (face value receivable on maturity)

PV is calculated to be $746,617.36

Value of the Treasury note is $746,617.36