When the Interest Rate Is 5% Per Annum with Continuous

question 20

Multiple Choice

When the interest rate is 5% per annum with continuous compounding, which of the following creates a $1000 principal protected note?

• A) A one-year zero-coupon bond plus a one-year call option worth about $59
• B) A one-year zero-coupon bond plus a one-year call option worth about $49
• C) A one-year zero-coupon bond plus a one-year call option worth about $39
• D) A one-year zero-coupon bond plus a one-year call option worth about $29

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Definitions:

\(n !\)

Denotes the factorial of n, which is the product of all positive integers less than or equal to n.

\(- 5^n\)

Represents an exponential expression where \(-5\) is the base and \(n\) is the exponent, indicating \(-5\) raised to the power of \(n\).

\(n ^ { 2 }\)

A notation denoting a number "n" raised to the power of 2, representing the square of n.

\(n ^ { 3 }\)

Refers to cubing a number, which is raising a number to the power of three or multiplying the number by itself twice.