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courses.aplia.com VileyPLUSs Aplia: Student Qu Home Grades Personalized Reviews Discussion Course Materials Bonds and Their Valuation Graded Assignment | Read Chapter 7 1 Back to Assignment Due Saturday 12.02.17 at 11:15 PM Attempts: Average: 4/4 4. 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 (YTM) has a coupon rate of 3%. The yield to maturity of the bond is 11.00%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: O $634,624.76 O $895,940.83 O $470,368.94 O $746,617.36 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: When valuing a semiannual coupon bond, the time period variable(N) used to calculate the price of a bond reflects the number of periods remaining in the bond's life 6- annual 12-month 4-month Flash Player MAC 2 3.34.12004-2016 Apla. Ali rights reserved 2013 cengage Learning except as noted. All rights reserved Grade lt Now Save & Continue without saving

Explanation / Answer

Formula used to calculate Value of bond is

P0 = C * PVIFA(r/2, n*2) + F * PVIF (r/2, n*2)

P0 = price of bond

C = coupon payment per instalment = 1000000 * 3% / 2 (due to semi-annual payment) = 15000

PVIFA = present value interest factor of annuity

PVIF = present value interest factor

r = discount rate for the year; since the payment is semi annual r / 2= 11%/2 = 5.5%

n = no. of years = 4; semi annual payment, no. of payment is n * 2 = 4*2 = 8

P0 = 15000 * PVIFA (5.5%, 8) + 1000000* PVIF(5.5%, 8)

PVIFA = (1 - (1 + r)^-n)/r = 6.3346

PVIF = 1/(1+r)^n = 0.6516

Substituting in P0 equation -

P0 = 15000 * 6.3346 + 1000000*0.6516 = 746617.36

hence, the answer is option 4 = $746,617.36

While valuing a semi annual coupon bond, the time period variable used to calculate the price of a bond reflects the number of annual periods remaining in the bond's life. Hence, there is a need to multiply the same by 2, which will help us arrive at the number of instalments of payment. So, the answer is 'Annual'.

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