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:

Amortizations

The act of spreading out loan payments over a period of time, including both the principal and the interest.

Gross Profit

The difference between sales revenue and the cost of goods sold, indicating the efficiency of a company in producing and selling its products.

Goodwill

An intangible asset that arises when a buyer acquires an existing business, representing the value of the business's reputation, brand, and other unquantifiable elements.

Equity Method

An accounting method used to assess the profits earned by investments in other companies, where the investment's value is adjusted according to the investor’s share of the investee's profit or loss.