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Question
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.
Answer
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