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:

Direct Labor Price Variance

The difference between the actual cost of direct labor and the expected (or standard) cost of direct labor used during production.

Direct Labor Payroll

The total amount of money paid to employees directly involved in manufacturing products or providing services.

Standard Rate of Pay

The regular amount of pay given for standard work hours or for performing a standard task or job.

Unfavorable Variance

The difference between actual costs and standard or budgeted costs when actual costs are higher, indicating lower profitability.