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

question 87

Multiple Choice

An FI manager purchases a zero-coupon bond that has two years to maturity.The manager paid $826.45 per $1,000 for the bond.The current yield on a one-year bond of equal risk is 9 percent, and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent.Either rate is equally probable. Given the exercise price of the option, what premium should be paid for this option?

• A)$2.2339 per $1,000 of bond option purchased.
• B)$4.0275 per $1,000 of bond option purchased.
• C)$2.2752 per $1,000 of bond option purchased.
• D)$2.2156 per $1,000 of bond option purchased.
• E)$3.8211 per $1,000 of bond option purchased.

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Definitions:

Producer

An individual, company, or entity that creates goods or provides services.

Total Cost

The entirety of expenses, fixed and variable, involved in the production of services or goods.

Market Price

The existing value at which an asset or service may be sold or acquired in a trading environment.

Sellers

Individuals or entities that offer goods or services for sale.