A Firm with Assets Value at $200,000 Issues a 3

question 6

Multiple Choice

A firm with assets value at $200,000 issues a 3 year zero-coupon bond with a par value of $250,000. Using a put option approach, what is the value of an insurance contract on the bond given r = .08, volatility is given as .23 and there is no dividend paid by the company?

• A) $29,672
• B) $31,582
• C) $33,331
• D) $42,195

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Definitions:

Cross-price Elasticity

A measure of how the quantity demanded of one good responds to a change in the price of another good, indicating substitutability or complementarity.

Substitutes

Products or services that can be used in place of each other. Higher the similarity, the more easily consumers can switch between them, affecting demand.

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, expressed as the percentage change in quantity demanded divided by the percentage change in price.

Midpoint Formula

A method for calculating the percentage change in a variable by dividing the change by the average of the initial and final values, often used in economics to measure elasticity.