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

Multiple Choice

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 exercise price of the option, what premium should be paid for this option?

A) $2.2339 per $1,000 of bond option purchased.
B) $4.0275 per $1,000 of bond option purchased.
C) $2.2752 per $1,000 of bond option purchased.
D) $2.2156 per $1,000 of bond option purchased.
E) $3.8211 per $1,000 of bond option purchased.