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 .65 .10
Bond price $970 $1,000 $1,150
A) $1,000.00
B) $1,007.50
C) $1,040.00
D) $1,100.33
Answer: B
Explanation: B) Expected payoff = Σ payoffi × probabilityi = .25 ∗ $970 + .65 ∗ $1,000 + .10 ∗ $1,150 = $1,007.50.
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