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? $$\begin{array} { | l | c | c | c | }
\hline & \text { Recession } & \text { Steady } & \text { Boom } \
\hline \text { Probability } & .35 & .55 & .10 \
\hline \text { Bond price } & \$ 970 & \$ 1,000 & \$ 1,150 \
\hline
\end{array}$$
A)$1,000.00
B)$1,007.50
C)$1,004.50
D)$1,100.33

Question

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? $$\begin{array} { | l | c | c | c | } 
\hline & \text { Recession } & \text { Steady } & \text { Boom } \
\hline \text { Probability } & .35 & .55 & .10 \
\hline \text { Bond price } & \$ 970 & \$ 1,000 & \$ 1,150 \
\hline
\end{array}$$
A)$1,000.00
B)$1,007.50
C)$1,004.50
D)$1,100.33

Quizplus · Accepted Answer

The expected selling price of each bond is calculated by multiplying each bond price by its probability and summing these products: $(0.35 	imes 970) + (0.55 	imes 1000) + (0.10 	imes 1150) = 339.5 + 550 + 115 = 1004.5$.

Your Investment Banking Firm Has Estimated What Your New Issue