Treasury notes offer twice-annual coupon payments for two, three, five, seven or 10 year terms. When the note matures at the end of the term, the face value of the note is paid to the investor. You can purchase Treasury notes at face value, pay a premium or purchase the note at a discount, depending on the value of the note. The net present value (NPV) of the note is a culmination of the NPV of the face value and coupon payments when compared to an alternative, safe-bet investment.
1. Divide the safe-bet alternative's interest rate by 2 to convert it into a comparable periodic interest rate. The safe-bet alternative might be a Treasury bill or savings account. As an example, if the alternative investment offered a 6 percent interest rate, this would be equivalent to 3 percent every six months.
2. Divide 1 by 1 plus the alternative periodic interest rate. This gives you the first-year discount multiplier. For example, divide 1 by 1.03 to get 0.97087.
3. Raise this figure to the nth power, where "n" is the number of periods in the note's term. This gives you the end-year discount multiplier. If the example note was a five year note, raise 0.97087 to the power of 10 to get 0.17367.
4. Multiply this value times the face value of the note to get its NPV. Treasury notes typically have a face value of $100, so in this example the note would have a face value NPV of $17.37.
5. Subtract the end-year discount multiplier from 1 and multiply the first-year discount multiplier. In this example, subtract 0.17367 from 1 and then multiply it by 0.97087 to get 0.80226.
6. Divide this figure by 1 minus the first-year discount multiplier. In this example, dividing by 1 minus 0.97087 gives you 27.541.
7. Multiply this value by the amount of the coupon payment, which is half the annual coupon rate times the face value of the note. If the example note offered a 4 percent coupon rate, multiply 0.02 times $100 to get a coupon payment of $2. Multiplying this by 27.541 derives the coupon payments' NPV of $55.08.
8. Add the face value's NPV to get the Treasury note's value. In the example, the note would be worth $72.45 compared to the alternate safe-bet investment.
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