radnorgardens
New member
- Joined
- Dec 2, 2014
- Messages
- 26
Hi all, I would be very grateful for some help with the following question:
If the interest rate is 6.5%, what is the PV of a security that pays $1,100 next year, $1,200 three year from now and $1,400 six year from now. If this security sold for $10,500, is the yield to maturity greater or less than 6.5% and why?
I started thinking that the question referred to three different securities, as I tried to work out the PV as follows:
$1,100 / (1+0.065) = $1,032.86
$1,200 / (1+0.065)3 = $993.42
$1,400 / (1+0.065)6 = $959.47
But my teacher said this was not the case. I looked again and it now seems to me that it refers to an income stream, like a coupon bond, but I thought the coupon on bonds are a % based on the nominal value, so the income would not change from to year to year....
At this point I am stuck....
Many thanks for any help.
If the interest rate is 6.5%, what is the PV of a security that pays $1,100 next year, $1,200 three year from now and $1,400 six year from now. If this security sold for $10,500, is the yield to maturity greater or less than 6.5% and why?
I started thinking that the question referred to three different securities, as I tried to work out the PV as follows:
$1,100 / (1+0.065) = $1,032.86
$1,200 / (1+0.065)3 = $993.42
$1,400 / (1+0.065)6 = $959.47
But my teacher said this was not the case. I looked again and it now seems to me that it refers to an income stream, like a coupon bond, but I thought the coupon on bonds are a % based on the nominal value, so the income would not change from to year to year....
At this point I am stuck....
Many thanks for any help.