Assume that a $1,00,000 par value, semiannual coupon U. S. Treasury note with five years to maturity (YTM) has a coupon rate of 5%. The yield to maturity of the bond is 11.00%. Using ths information and ignoring the other costs involved, the value of the T-note is calculated as $773,871.23 Based on this calculation and an understanding of semiannual coupon bonds, complete the following statements:

1. Assuming the interest rates remain constant, the T-notes price is expected to . (Increase or Decrease) Please Explain Why.
2. The T-note described is selling at a . (Premium or Discount) Please Explain Why.
3. When valuing a semiannual coupon bond, the time period N in the present value formula used to calculate the price of the bond is treated in terms of periods. (Annual, 6 month, 4 month, 12 month)

Completing the following statements based on the calculations and an understanding of semiannual coupon bonds:

1. Assuming the interest rates remain constant, the T-notes price is expected to . (Increase or Decrease).

The reason for the increase in the T-notes price is the addition of the amortization for the 6-month period of $17,563.

2. The T-note described is selling at a . (Premium or Discount)

The T-note sells at a discount because the face value is greater than the price.  This implies that at the end of the maturity period of 5 years, the amount that will be received or paid is $1,000,000 and not the price that was initially received or paid.

3. When valuing a semiannual coupon bond, the time period N in the present value formula used to calculate the price of the bond is treated in terms of periods. (Annual, 6 month, 4 month, 12 month)

Semiannual = 6 months (12/2).

Explanation:

a) Data anc Calculations:

Face value of semiannual coupon U.S. Treasury note = $1,000,000

T-note price = $773,871.23

Discount on the note = $226,128.77 ($1,000,000 - $773,871.23)

Maturity period = 5 years

Coupon rate = 5%

Yield rate = 11%

Semiannual coupon payment = $25,000 ($1,000,000 * 2.5%)

Semiannual interest expense = $42,563 ($773,871.23 * 5.5%)

Amortization of discount =          $17,563 ($42,563 - $25,000)

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