Question

a) A security pays $100 in one year and $100 in two years. The one-year discount rate is 4%, the two-year is 4.92%. What is its price?

b) What is the “common” discount rate – i.e., the same discount rate is applied to both years – such that it produces the price you calculate in a)? This is known as the security’s “yield-to-maturity” (or “yield”).

Answer 1

a.

Price = 100 / (1+4%)^1 + 100 /(1+4.92%)^2

Price = $187.00

b.

We can solve this by financial calculator:

Using financial calculator BA II Plus - Input details:	#
FV = Future Value / Face Value =	$0.00
PV = Present Value =	-$187.00
N = Number of years remaining x frequency =	2
PMT = Payment = Coupon / frequency =	$100.00
CPT > I/Y = Rate = YTM =	4.60
Convert rate in yearly rate =	4.60%