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Homework answers / question archive / Your investment banking firm has estimated what your new issue of bonds is likely to sell for under several different economic conditions
Your investment banking firm has estimated what your new issue of bonds is likely to sell for under several different economic conditions. What is the expected (average) selling price of each bond? Recession Steady Boom Probability .25 .60 .15 Bond price $960 $1,000 $1,110 Select one: O a. $1,000.00 O b. $1,100.33 O c. $1,004.50 O d. $1,006.50
Answer : Correct Option is (d.) $1,006.50
Calculations :
Calculation of Expected Price = (Bond Price in Recession * Probability of recession) + (Bond Price in Steady * Probability of Steady) + (Bond Price in Boom * Probability of Boom)
= (960 * 0.25) + (1000 * 0.60) + (1110 * 0.15)
= 240 + 600 + 166.5
= 1006.5
