Bonds Maturing in 1,2,and 3 Years Have Prices of 0

question 16

Multiple Choice

Bonds maturing in 1,2,and 3 years have prices of 0.9323,0.8762,and 0.8002,respectively.A 0.8900 call on a 1-year bond matures in 1 year with σ = 0.25.What is the price of a 10.0% interest rate caplet that expires in 1 year?

• A) $0.50
• B) $0.60
• C) $0.70
• D) $0.80

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