Answer :
Answer:
Value of treasury Note =$ 746,617.36
Explanation:
The value of the notes is the present value of future cash flow discounted at its YTM of 11%. The value of the Note is the present value of the future cash receipts expected from the it.
The value is equal to present values of interest payment and the redemption value (RV).
Value of Notes = PV of interest + PV of RV
The value of Note can be worked out as follows:
Step 1
Calculate the PV of Interest payment
Present value of the interest payment
PV = Interest payment × (1- (1+r)^(-n))/r
r-Yield to Maturity, n- number of years
Interest payment = 3% × $1,000,000 × 1/2= $15000 .
Semi-annual interest yield = 11%/2 =5.5%
PV = 15,000 × (1 - (1.055)^(-3×2)/0.055) =
Step 2
PV of redemption Value
PV of RV = RV × (1+r)^(-n)
= 1,000,000 × (1.055)^(-4× 2)
= 651,598.87
Step 3
Calculate Value of the Notes
= 95,018.49 + 651,598.87
= $ 746,617.36
Value of treasury Note =$ 746,617.36