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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 4%. 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: $925,985.64 $655,906.50 $771,654.70 $486,142.46 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. A security with higher risk will have a higher expected return. A bond's risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important. The curves on the following graph show the prices of two 10% annual coupon bonds at various interest rates. BOND VALUE ($1 2000 1750 1500 1250 1000 1-Year Bond 750 500 10-Year Bond 250 0 4 8 12 16 20 INTEREST RATE (%) Based on the graph, which of the following statements is true? The 10-year bond has more interest rate risk. The 1-year bond has more interest rate risk. ONeither bond has any interest rate risk. Both bonds have equal interest rate risk. Which type of bonds offer a higher yield? Callable bonds Noncallable bonds Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, the shorter a bond's maturity, the more its price will change in response to a given change in interest rates. False True

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