If the interest rate is 5%, what is the present value of a security th

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 $2200, is the yield to maturity greater or less than 5%? Why?

What will be an ideal response?

ANSWER

PV = $1,050/(1. +.05 ) + $1,102.50/(1 + 0.5 )2
PV = $2,000
If this security sold for $2200, the yield to maturity is less than 5%. The lower the interest rate the higher the present value.