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Assume that a $1,000,000 par value, semiannual coupon US 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, calculate the value of the Treasury note: $634,624.76

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hyderali230

Answer:

Value of treasury note is $746,617.36

Explanation:

Value of Treasury Note is actually the present value of all cash flows of the treasury note.  Value of Treasury Note is calculated by following formula:

Value of Treasury Note = C x [ ( 1 - ( 1 + r )^-n ) / r ] + [ F / ( 1 + r )^n ]

Coupon payment = C = $1,000,000 x 3% = $30,000 per year = $30,000 / 2 = $15,000 semiannual

YTM = 11% per year = 11% /2  = 5.5% semiannual

Number of periods = 4 years x 2 periods each year = 8 periods

Value of Treasury Note = $15,000 x [ ( 1 - ( 1 + 5.5% )^-8 ) / 5.5% ] + [ $1,000 / ( 1 + 5.5% )^8 ]

Value of Treasury Note = $95,018.49 + $651,598.87

Value of Treasury Note = $746,617.36