Suppose investors have interest rate expectations as illustrated in the decision tree below where the 1-year rate is expected to be 8%, 6%, or 4% in the second year and either 7% or 5% in the first year for a zero-coupon bond.
If investors are risk-neutral, what is the price of a $1 face value 2-year zero-coupon bond today?
A$0.88113.
B$0.88634.
C$0.89007.
D$0.89032.
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