An FI Manager Purchases a Zero-Coupon Bond That Has Two

question 39

Multiple Choice

An FI manager purchases a zero-coupon bond that has two years to maturity.The manager paid $76.95 per $100 for the bond.The current yield on a one-year bond of equal risk is 12 percent, and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent.Either rate is equally probable. Given the exercise price of the option, what premium should be paid for this option?

• A)$0.2143 per $100 of bond option purchased.
• B)$0.4420 per $100 of bond option purchased.
• C)$1.2768 per $100 of bond option purchased.
• D)$0.2321 per $100 of bond option purchased.
• E)$1.1652 per $100 of bond option purchased.

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Definitions:

Profit

The financial gain achieved when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Collusion

An agreement among firms, usually in secret, to fix prices or to divide markets among themselves, which restricts competition.

Fix Prices

Fix prices involves setting product or service prices at a certain level, often agreed upon among competitors to avoid undercutting each other, which is illegal in many jurisdictions.

Market Share

The share of a market dominated by a specific company or product, commonly represented as a proportion of the overall sales in that market.