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

question 32

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.
• E)$917.36.

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