1. Be able to explain the intrinsic and extrinsic components of an option’s premium, and be able to break down the premium into those two components. Know how to draw a graph that exhibits the premium and the intrinsic and extrinsic components.
2. Bill purchased a bond with a face value of $1,000 with a 10 years maturity, earning an interest of 5%. 5 years later interest rate go up to 7% and he decides to sell his bond. How musch can he ask for? Show your work.