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A bank asks you to design a five-year principal-protected note on the S&P 500. Assume the...

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Finance

A bank asks you to design a five-year principal-protected noteon the S&P 500. Assume the note has a $1,000 face value, therisk free rate is 3% with continuous compounding, and the bankwants to earn a sales commission of 5%. What do you suggest?Diagram out the instrument you developed and clearly explain therisks inherent in such a note. Does this seem like a good deal forthe bank’s clients?

Answer & Explanation Solved by verified expert
4.1 Ratings (872 Votes)
In the excel sheet the way to find out the future value of notehas been shownThe function shows the formula of continuous compounding Futurevalue is 116183Since brokerage to be added with the face value Thereforebrokerage is 5 of 1000 50So an investor has to pay 1050 for a bond to earn 116183after 5 yearsRisk inherent in such a noteGenerally in case of risk free    See Answer
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Transcribed Image Text

A bank asks you to design a five-year principal-protected noteon the S&P 500. Assume the note has a $1,000 face value, therisk free rate is 3% with continuous compounding, and the bankwants to earn a sales commission of 5%. What do you suggest?Diagram out the instrument you developed and clearly explain therisks inherent in such a note. Does this seem like a good deal forthe bank’s clients?

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