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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.
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.
Answer
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