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

question 81

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. 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)$862.10.
• B)$743.23.
• C)$900.93.
• D)$811.70.
• E)$917.36.

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Definitions:

Overconfidence

Overestimating an individual’s prospects or abilities.

Investor

refers to an individual or entity that allocates capital with the expectation of receiving financial returns.

Risk

The exposure to uncertainty or the potential for financial loss and variability in investment returns.

Probability

A measure of the likelihood of a certain event or outcome, typically expressed as a number between 0 and 1.