When the interest rate is 5% per annum with continuous compounding,which of the following creates a principal protected note worth $1000?
A) A one-year zero-coupon bond plus a one-year call option worth about $59
B) A one-year zero-coupon bond plus a one-year call option worth about $49
C) A one-year zero-coupon bond plus a one-year call option worth about $39
D) A one-year zero-coupon bond plus a one-year call option worth about $29

Question

Quizplus · Accepted Answer

A one-year zero-coupon bond is worth 1000e^-0.05×1 or about $951.This leaves 1000−951 = $49 for buying the option.

When the Interest Rate Is 5% Per Annum with Continuous