Answer: $0.89007

## Explanation In a risk-neutral framework, the price of a zero-coupon bond is calculated as the present value of its face value using risk-free rates. For a 2-year zero-coupon bond with $1 face value, the price would be: \[ P = \frac{1}{(1 + r)^2} \] Where \( r \) is the appropriate risk-free rate. Among the given options: - **$0.88113** corresponds to a higher discount rate - **$0.88634** and **$0.89032** are also possible prices depending on the specific risk-free rate used - **$0.89007** is the correct answer as it represents the appropriate present value calculation under risk-neutral assumptions The risk-neutral pricing approach assumes that investors don't require compensation for risk, so they discount future cash flows at the risk-free rate only. This is a fundamental concept in fixed income pricing and derivatives valuation.

Author: LeetQuiz .