Assume Annual Compounding $\sigma = 0.30$ What Is the Price of a One-Year Maturity Cap

question 3

Multiple Choice

Assume annual compounding. The one-year and two-year zero-coupon rates in the BDT model are 6% and 7%. The volatility is given to be $\sigma = 0.30$ . What is the price of a one-year maturity cap on the one-year interest rate at a strike rate of 8% and a notional of $100?

• A) 1.000
• B) 1.025
• C) 1.050
• D) 1.075

---

Definitions:

Adjusting Entry

An accounting record made to update the financial statements to reflect transactions that have occurred but are not yet recorded.

Interest Expense

The cost incurred by an entity for borrowed funds, usually presented as an expense in the income statement.

Times Interest Earned Ratio

A metric that measures a company's ability to meet its debt obligations by comparing income before interest and taxes to interest expenses.

Net Income

The total profit of a company after all expenses and taxes have been deducted from total revenue, representing the company's bottom line.