Assume the spot price of corn is $2.30 per bushel and the 3-year forward price is $2.45. Annualized 1-year, 2-year, and 3 year interest rates are 4.2%, 4.4%, and 4.6%, respectively. For a commodity-linked note to sell at par, what is the annual coupon?
A) $0.06
B) $0.16
C) $0.26
D) $0.36

Question

Quizplus · Accepted Answer

The correct answer is A.The annual coupon is calculated as the difference between the forward price and the spot price, divided by the present value of $1 received in 3 years. The present value of $1 received in 3 years is calculated as 1 / (1 + r)^3, where r is the annualized 3-year interest rate. In this case, the annual coupon is calculated as (2.45 - 2.30) / (1 + 0.046)^3 = 0.06.

Assume the Spot Price of Corn Is $2