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Assume that the volatility of the S P index is 30

Assume that the volatility of the S&P index is 30% and consider a bond with the payoff S2 + λ × [max(0, S2 − S0) − max(0, S2 − K)].

a. If λ = 1 and K = $1500, what is the price of the bond?

b. Suppose K = $1500. For what λ will the bond sell at par?

c. If λ = 1, for what K will the bond sell at par? The next six problems will deal with the equity-linked CD in Section 15.3. If necessary, use the assumptions in that section.

a. If λ = 1 and K = $1500, what is the price of the bond?

b. Suppose K = $1500. For what λ will the bond sell at par?

c. If λ = 1, for what K will the bond sell at par? The next six problems will deal with the equity-linked CD in Section 15.3. If necessary, use the assumptions in that section.

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