US Treasury notes currently pay an effective annual rate (yield) of 4%. Your financial advisor offers you a savings product that his firm is selling for $1000 that matures in 4 years and pays $35 at the end of each year, plus the original $1000 at maturity (in other words, they are $1000 face value bond that pay a 3.5% coupon). If the savings product has the same risk as US treasuries, which is a better investment? What is the savings product's effective annual yield?

US Treasury notes currently pay an effective annual rate (yield) of 4%. Your financial advisor offers you a savings product that his firm is selling for $1000 that matures in 4 years and pays $35 at the end of each year, plus the original $1000 at maturity (in other words, they are $1000 face value bond that pay a 3.5% coupon). If the savings product has the same risk as US treasuries, which is a better investment? What is the savings product's effective annual yield?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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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 three years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $567,545.29 $765,735.71 $900,865.54 $1,081,038.65 Based on your calculations and understanding of semiannual coupon bonds, complete the following statement: Assuming that interest rates remain constant, the T-note’s price is expected to ( Increase, Decrease).
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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 five years to maturity has a coupon rate of 6%. The yield to maturity (YTM) of the bond is 9.90%. Using this information and ignoring the other costs involved, calculate the value of the Treasury note: $534,907.72 $849,059.88 $1,018,871.86 $721,700.90 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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