The T-Note should be sold at discount as it is less than the par value.
A Treasury note, sometimes known as a "T-note," is a marketable form of U.S. government debt with a fixed interest rate and a maturity of two to ten years. Both competitive and noncompetitive bids are accepted from the public when purchasing Treasury notes from the government.
The yield and the bond's principal, or face value, are returned to investors by the Treasury in exchange for their investment. Due to their safety, income, and lower risk compared to other bond types, Treasury notes are a favorite among investors.
The computation of the value of the treasury note is shown below:
Given:
NPER = 4 × 2 = 8
RATE = 11% ÷ 2 = 5.5%
PMT = $1,000,000 × 3% ÷ 2 = $15,000
FV = $1,000,000
The formula is shown below:;
= -PV(RATE; NPER; PMT; FV)
After applying the above formula, the value of the treasury note is $746,617.36
Therefore, the T-Note should be sold at discount as it is less than the par value
The complete question is:
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 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:
a. $895,940.83
b. $634,624.76
c. $746,617.36
d. $470,368.94
Based on your calculations and understanding of semiannual coupon bonds, complete the following statement:
The T-note described in this problem is selling at a:_______
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