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

question 60

Multiple Choice

An FI manager purchases a zero-coupon bond that has two years to maturity.The manager paid $826.45 per $1,000 for the bond.The current yield on a one-year bond of equal risk is 9 percent,and the one-year rate in one year is expected to be either 11.60 percent or 10.40 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)$862.10.
• B)$743.23.
• C)$900.93.
• D)$811.70.

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Definitions:

Memory Cards

Portable electronic storage devices used for storing digital information in various electronic devices, such as cameras, phones, and computers.

Cross Elasticity of Demand

A measure of how the quantity demanded of one good changes in response to a price change in another good.

Substitutes

Goods or services that can replace each other in usage, offering alternative choices to consumers.

Complements

Goods or services that are used together, where the use of one increases the demand for the other.