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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Definitions:

Profit Maximization

The process of determining the best output and pricing levels to achieve the most profit.

Production Function

An equation in mathematics that outlines how inputs correlate with the greatest output achievable from those inputs.

Supply Function

A mathematical relationship that describes the quantity of a good or service that producers are willing to sell at each possible price.

Long-Run Total Cost Function

An economic concept that describes how the total cost of production changes in response to changes in output over the long term, when all input factors can be varied.