The EMV of a Decision with Three States of Nature

question 92

Essay

The EMV of a decision with three states of nature is $33,000. If the profit/value under the states of nature A, B, and C is $10,000, $20,000, and $50,000 and states B and C have equal probabilities, determine the likelihood of state of nature A.

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Definitions:

Coupon

The interest rate on a bond that the issuer promises to pay to the holder until maturity.

Zero-Coupon Bond

A bond that does not pay periodic interest and is sold at a discount from its face value, with the return being the difference between the purchase price and the bond's face value at maturity.

Duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates, often indicating the bond's price volatility.

Coupon

The interest rate stated on a bond when issued, which is typically paid at regular intervals until maturity.