Answer to Question #225242 in Finance for Raji

Question #225242
You buy a bond for $1000 today that promises interest of $50 in one year plus the return of your principal. However, the probability that the company will default and not pay you either interest nor repay your principal is 1 percent. The expected return on the bond is ____ percent.
1
Expert's answer
2021-08-11T09:18:36-0400

Solution:

The expected value of a bond after one year = Sum (Return x Probability)

Where: Return = Expected return

Probability = Expected probability

Probability of 0.01 will yield $0 expected returns

Probability of 0.99 will yield $1,050 expected returns

The expected value of a bond after one year = (0 0.01) + (1050 0.99) = 0 + 1039.5 =

The expected value of a bond after one year =

Therefore, the expected return of a bond =

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