Question

Analysts estimate that one year from today, a bond has a probability of 40 percent of being priced at $950 and a probability of 60 percent of being priced at $1,050. The bond is also callable at any time at $1,010. What is the expected value of this bond in one year

Answer 1

Expected value of bond = $986

Step-by-step explanation:

given data

probability = 40 percent

priced = $950

probability = 60 percent

priced = $1050

Callable price bond = $1010

solution

we get here Expected value of bond in one year that is express as

Expected value of bond = (Probability × Price of bond) + (Probability × Callable price bond) ................1

put here value and we get

Expected value of bond = (0.4 × $950) + (0.60 × $1010)

solve it we get

Expected value of bond = $986