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

question 34

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. If the manager buys a one-year option with an exercise price equal to the expected price of the bond in one year, what will be the exercise price of the option?

• A)$84.00.
• B)$85.99.
• C)$86.21.
• D)$85.74.
• E)$85.96.

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Definitions:

Sales Increases

A measurement of the rise in a company's sales over a specific period, indicating growth in business operations.

Capital Intensity Ratio

A metric used to determine the amount of assets required to generate a dollar of revenue; higher ratios indicate more assets are needed.

Accounts Payable

Financial obligations or debts owed by a company to its creditors or suppliers for goods and services received.

Net Income

Refers to the total profit of a company after all expenses and taxes have been subtracted from revenue.