Original practice · fully worked
Original variant: total redemption from equal investments in three zeros
Three zero-coupon bonds cost 0.90, 0.92, and 0.95 per unit of redemption value. An investor places 2,000 into each bond. Calculate the total redemption amount received when all three mature.
- A
6,000.00 - B
6,247.83 - C
6,381.74 - D
6,501.40 - E
6,742.11
Answer and calculation
The three reciprocal-price amounts total 6501.40. Total redemption is 6,501.40, selecting choice D.
Setup
Setup
For each zero, face or redemption amount equals dollars invested divided by price per unit redemption.
Fk=2000/pk,p=(0.90,0.92,0.95) Model
Model
Compute the three redemption amounts separately and add them; averaging prices before inversion is not valid.
F=2000(1/0.90+1/0.92+1/0.95) Compute
Compute
The three reciprocal-price amounts total 6501.40.
F=6501.398424 Answer
Answer
Total redemption is 6,501.40, selecting choice D.
F=6501.40(D) 