A firm with assets value at $200,000 issues a 3 year zero-coupon bond with a par value of $250,000. Using a put option approach, what is the value of an insurance contract on the bond given r = .08, volatility is given as .23 and there is no dividend paid by the company?
A) $29,672
B) $31,582
C) $33,331
D) $42,195

Question

Quizplus · Accepted Answer

The value of the insurance contract on the bond can be calculated using the Black-Scholes option pricing model for a put option. Given the parameters, the correct calculation results in a value of approximately $29,672.

A Firm with Assets Value at $200,000 Issues a 3