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.
-Given the expected one-year rates in one year, what are the possible bond prices in one year?
A)$85.22 and $86.25.
B)$85.73 and $86.69.
C)$85.22 and $86.69.
D)$85.73 and $86.25.
E)$83.35 and $84.65.

Question

Quizplus · Accepted Answer

The bond price in one year can be calculated using the formula for zero-coupon bonds: Price = Face Value / (1 + rate). For the two possible rates in one year (16.65% and 15.35%), the bond prices are $85.73 and $86.69, respectively.

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