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13 December, 09:36

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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  1. 13 December, 09:41
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    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
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