A market risk manager seeks to calculate the price of a 2-year zero-coupon bond. The 1-year interest rate today is 10.0%. There is a 50% probability that the 1-year interest rate will be 12.0% and a 50% probability that it will be 8.0% in 1 year. Assuming the risk premium of duration risk is 50 bps each year, and the bond's face value is EUR 1,000, what is the correct price of the zero-coupon bond?

Answer rating: 100% (QA)

Step 1 Calculate the expected interest rate at the end of ... View the full answer