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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 bonde Recession Boom Steady .60 25 .15 Probability Bond price $960 $1,000 $1,110 Select one: a. $1.100.33 O b. $1,004,50 O c. $1.000.00 O d. $1.006.50
Expert Solution
The expected price is equal to the sum of probabilities of the economy times the bond price in that economy.
Thus, bond price = (prob1)*(bond price1) + (prob2)*(bond price2) + (prob 3)*(bond price 3)
Where prob1,2,3 are the three different probabilities and bond price 1,2,3 are bond prices with that probability.
Thus, bond price =( 0.25*960 ) +(0.60*1000) + (0.15*1110) = $1006.50
Thus, the correct option is d. $1006.50
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