An FI Manager Purchases a Zero-Coupon Bond That Has Two

question 111

Multiple Choice

An FI manager purchases a zero-coupon bond that has two years to maturity.The manager paid $76.95 per $100 for the bond.The current yield on a one-year bond of equal risk is 12 percent,and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent.Either rate is equally probable.

If the manager buys a one-year option with an exercise price equal to the expected price of the bond in one year,what will be the exercise price of the option?

• A)$84.00.
• B)$85.99.
• C)$86.21.
• D)$85.74.

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