A $100 face value one-year risk-free discount bond is priced at $95.The two-year discount bond is priced at $90.After one year,the two-year bond will take one of three equiprobable prices,spaced $5 apart.The middle value of these possible prices is
A)$90.25
B)$94.75
C)$95.00
D)$100.00

Question

Quizplus · Accepted Answer

The middle value after one year would be $94.75, considering the bond's price moves in $5 increments and starts at $90 for a two-year term. Given the equiprobable nature of the price changes and the initial $90 price, the middle value after one year would logically be $5 less than the face value ($100) due to the bond nearing its maturity and the discount narrowing.

A $100 Face Value One-Year Risk-Free Discount Bond Is Priced