Question: Suppose there is no uncertainty. There is an investment plan in which you pay $100 in t and receive $5 in t+1 and $105 in t+2. Which of the following should the yield to maturity, i, satisfy? -Free Course Hero Question Answer.

Question Description: Suppose there is no uncertainty. There is an investment plan in which you pay $100 in t and receive $5 in t+1 and $105 in t+2. Which of the following should the yield to maturity, i, satisfy?

Free Course Hero Answer

Course Hero Answer & Explanation:

The yield to maturity (i) is 5% or 0.05, the calculation is provided below.

Step-by-step explanation

Yield to maturity is the discount rate at which sum of all discounted cash inflows flows (t1 and t2) are equal to current cash outflow (t0),

Mathematically, it will equate current cash paid of $100 with present values of t1 ($5) and t2 ($105), We can write:

$100 = $5/(1+i) + $105/(1+i)2

If we solve for i, we will get i = 5%,

So if we put i = 5% or 0.05 in the above equation then both sides will be equal,

$100 = $5/(1.05) + $105/(1.05)2

$100 = $100.

Thus yield to maturity is 5%.

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