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.

Question

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?

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.

Quizplus · Accepted Answer

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.

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