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

question 93

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.
-Given the expected one-year rates in one year, what are the possible bond prices in one year?

• A)$85.22 and $86.25.
• B)$85.73 and $86.69.
• C)$85.22 and $86.69.
• D)$85.73 and $86.25.
• E)$83.35 and $84.65.

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Definitions:

Strategic Options

Various choices available to a company to achieve its business objectives and increase shareholder value.

Financial Break-Even

The point at which total revenues exactly match total expenses, resulting in neither profit nor loss.

Sales Quantity

The cumulative quantity of a product or service purchased over a designated timeframe.

Cash Inflows

The total amount of money being transferred into a company, typically from operations, financing, and investing activities.