Question

34) If a security pays $110 next year and $121 the year after that, what is its yield to maturity if it sells for $200? A) 9 percent B) 10 percent C) 11 percent D) 12 percent

Answer 1

To find the yield to maturity of a security selling for $200 with payments of $110 next year and $121 the year after, we solve the financial equation for YTM that sets the present value of the future cash flows equal to the current price of the security.

Step-by-step explanation:

The question is asking to calculate the yield to maturity (YTM) of a security that pays $110 in one year and $121 in the following year, and currently sells for $200. To find the YTM, we are looking for the discount rate that equates the present value of the security's future cash flows to its current price. This calculation involves solving the equation 200 = 110/(1+YTM) + 121/((1+YTM)^2), which requires financial calculus or a trial-and-error approach. Without specific values to plug in, we can logically deduce that since the security's payments are higher than its cost, the YTM must be positive, and because the price is above typical face values for bonds, the YTM is likely less than typical market rates.