What is the price of a 2-year equity-linked CD under the following terms? No coupon is paid.At maturity the CD pays 80.0% of the S&P 500 index appreciation.The S&P 500 price = 900,div = 0.02,σ = 0.20,and interest rates are 5.0%.
A) $890.22
B) $990.23
C) $1064.20
D) $1110.55

Question

Quizplus · Accepted Answer

The price of the equity-linked CD is calculated by discounting the expected payoff at maturity. Since the CD pays 80% of the S&P 500 index appreciation, the payoff is linked to the index's growth. Given the interest rate of 5%, the present value of the expected payoff is closest to $890.22.

What Is the Price of a 2-Year Equity-Linked CD Under