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. Given the expected one-year rates in one year, what are the possible bond prices in one year?
A)$912.40 and $922.32.
B)$857.27 and $866.93.
C)$734.90 and $751.56.
D)$896.06 and $905.80.
E)$802.92 and $820.47.

Question

Quizplus · Accepted Answer

The bond price in one year can be calculated using the formula for the present value of a zero-coupon bond: Price = Face Value / (1 + yield)^n. For the two possible yields in one year (11.60% and 10.40%), the bond prices are calculated as follows: $1,000 / (1 + 0.116) = $896.06 and $1,000 / (1 + 0.104) = $905.80.

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