Recall that a zero-coupon bond with face value B and expiry T is a bond that pays B at time T.

1. Assuming a constant, continuous rate r , give a formula for Z(t, T), the price of the bond at time t.

2. If S is any stock or index, draw a payoff diagram, as a function of S, for a 1-year zero coupon bond with face value 100.

3. If the effective rate , (not continuous) is 5%, what is the price of the bond in part 2? If the continuous rate is 5%, what is the price of the bond in part 2?