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

question 36

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 exercise price of the option, what premium should be paid for this option?

• A)$0.2143 per $100 of bond option purchased.
• B)$0.4420 per $100 of bond option purchased.
• C)$1.2768 per $100 of bond option purchased.
• D)$0.2321 per $100 of bond option purchased.
• E)$1.1652 per $100 of bond option purchased.

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Definitions:

Eyewitness Memory

The recall by individuals of events they have witnessed, significant in legal contexts but known for its potential for inaccuracy and susceptibility to suggestion.

Prone to Error

Having a higher likelihood or tendency to make mistakes or inaccuracies.

Questioning

The act of asking questions to seek information, understand, or challenge.