A bank decides to create a fiveyear principalprotected note on a nondividendpaying stock by offering investors a zerocoupon bond plus a bull spread created from calls. The riskfree rate is 5% and the stock price volatility is 25%. The low strike price option in the bull spread is at the money.

i) What is the value of the discount bond; ii) What is the intrinsic value for the high strike price option and iii) What is the maximum ratio of the higher strike price to the lower strike price in the bull spread? Assume that the spot price is $100 and Use DerivaGem with trial and error.

a. i) $90; ii) $83.42 iii) 1,8342

b. i) $77.8801; ii) $0; 1.8342

c. i) $83.42; ii) 1.8342 iii) $90

d. None of the others

e. i) $0; ii) 1.8342; iii) $77.8801