Question

If the interest rate is 5%, what is the present value of a security that pays you $1,050 next year and $1,102.50 two years from now? If this security sold for $2,200, is the yield to maturity greater or less than 5%? Why?

Answer 1

Answer:

2000

iT IS LESS THAN 5%. It is -1.43%

Explanation:

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

Cash flow in year 1 = 1050

Cash flow in year 2 = 1102.50

pv = 2000

IRR is the same as YTM

Cash flow in year 0 = $-2,200

Cash flow in year 1 = 1050

Cash flow in year 2 = 1102.50

IRR = -1.43

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute