Calculate the expected return on a $6,000 bond that pays 6 percent of face value and whose price has a 30-percent chance of falling by $1,000 and a 70-percent chance of rising by $1,000.

Question

Quizplus · Accepted Answer

The expected return is the sum of the possible returns weighted by their probabilities. The possible returns are -$400 (30% chance) and $1,400 (70% chance). The expected return is therefore:(0.3 * -$400) + (0.7 * $1,400) = $760

Calculate the Expected Return on a $6,000 Bond That Pays