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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?
A) $1,000
B) $980
C) $1,010
D) $995
E) $986

Answer :

Answer:

E) $986

Explanation:

The computation of the expected value of the bond in one year is shown below;

= (Probability × Price of bond) + (Probability × Callable price bond)

= (0.4 × $950) + (0.60 × $1,010)

= $986

Hence, the expected value of the bond in one year is $986

Therefore the correct option is E.  

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