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? asked in Social ScienceEconomics · 8 years ago

Question about Expected Return on a Bond?

You are considering buying a discount bond that costs $1000 today and pays you $1200 in one year. However, there is a 10% chance that the company issuing the bond will go bankrupt and not pay you your interest or return your principal. What is the expected return on the bond?

A) 20%

B) 10%

C) 8%

or

D) -4%

Best answer to whoever answers correctly and fastest. Thank you in advance!

2 Answers

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  • Wizened wizard
    Lv 7
    8 years ago
    Favorite Answer

    90% chance of 1,200

    10% chance of 0

    Expected return in dollars = 90% x 1,200 + 10% x 0 = 1,080.

    As a rate of return, ( 1080 - 1000 ) / 1000 = 8.00%

  • ?
    Lv 7
    8 years ago

    C. 8%

    Calculate as follows...

    (9 x 1200) / (10 x 1000) = 1.08

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