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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Definitions:

Actual Cost

Actual cost is the true amount of money spent on producing a product, completing a project, or conducting an activity, including all direct and indirect expenses.

Direct Labor Rate Variance

The difference between the actual rate and the standard rate paid for direct labor multiplied by the actual direct labor hours used in producing a product.

Direct Labor

The wages paid to workers who are directly involved in the production of goods or services.

Direct Labor Rate Variance

The difference between the expected cost of direct labor per unit of production and the actual cost incurred.