What is the value of the equity-linked cd

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Charles Schwab once offered investors an equity-linked Certificate of Deposit, issued by First Union National Bank. This product guarantees to repay the invested amount after 5.5 years, plus 70% of the simple appreciation in the S&P 500 over that time.

(a) Suppose the S&P 500 index is 1300 at the time you invest $10,000 in the equity-linked CD. Show that the equity-linked CD is equivalent to a combination of a zero-coupon bond and certain number of call options on the S&P 500 index. What is the face value of the bond? What is the number of the options?

(b) Suppose that the 5.5-year interest rate is 6%, the volatility of the index is 30%, and the dividend yield is 1.5%. What is the value of the equity-linked CD that you invest?

Reference no: EM132645065

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