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. 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)$84.00.
B)$85.99.
C)$86.21.
D)$85.74.
E)$85.96.

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The Answer of 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. 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)$84.00.
B)$85.99.
C)$86.21.
D)$85.74.
E)$85.96.

An FI Manager Purchases a Zero-Coupon Bond That Has Two