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29 March, 19:54

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

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  1. 29 March, 21:23
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    Expected value of bond = $986

    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
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