Question

An S&P 500 index linked CD matures in 3 years, with the face value the same as the current S&P 500 index price, $ 1350. Upon its maturity, the investor will be paid back the face value, plus 80% of the gain on the S&P 500 index. When the CD matures in 3 years and the S&P index goes up to $1500, who would be the total payoff from the CD?

$1350
$1470
$1500
$1600

Answer 1

Face value of the CD = $1350

S&P 500 index at maturity = $1500

Percentage of gain on the S&P 500 index = 80%

To calculate the gain on the S&P 500 index, we find the difference between the index value at maturity and the face value of the CD:

Gain on the S&P 500 index = S&P 500 index at maturity - Face value of the CD

Gain on the S&P 500 index = $1500 - $1350

Gain on the S&P 500 index = $150

The total payoff from the CD is the sum of the face value and 80% of the gain on the S&P 500 index:

Total payoff = Face value + (Percentage of gain * Gain on the S&P 500 index)

Total payoff = $1350 + (0.80 * $150)

Total payoff = $1350 + $120

Total payoff = $1470

Therefore, the total payoff from the CD when it matures in 3 years and the S&P 500 index goes up to $1500 would be $1470.