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11 February, 21:27

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

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  1. 11 February, 23:52
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    40% probability that bond will be priced at $950

    60% probability that bond will be priced at $1050

    Expected value of the bond in one year:

    (Probability*Price of bond) + (Probability * Callable price bond) = (0.4*$950) + (0.60*$1010) = $986

    So, expected value is $986
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