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

Question

Quizplus · Accepted Answer

To calculate the yield to maturity, we need to find the interest rate that makes the present value of the security's cash flows equal to its current price.

Using a financial calculator or spreadsheet function, we can input the following:
- N = 2 (since there are two cash flows)
- PV = -200 (the security's current price, which is negative because it represents a cash outflow)
- PMT1 = 110 (the first cash flow)
- PMT2 = 121 (the second cash flow)
- FV = 0 (since there is no final payment)

Solving for the interest rate, we get a yield to maturity of approximately 10 percent. Therefore, the best choice is B.

If a Security Pays $110 Next Year and $121 the Year