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.