Suppose a Discount Bond Costs $5,000 Today and Pays Off

question 67

Essay

Suppose a discount bond costs $5,000 today and pays off some amount b in one year.Suppose that b is uncertain according to the following table of probabilities: $$\begin{array} { l l l l l l } \text { b: } & \$ 5,000 & \$ 5,500 & \$ 6,000 & \$ 6,500 & \$ 7,000 \\\text { Probability. } & 0.1 & 0.2 & 0.3 & 0.2 & 0.2\end{array}$$
a.Calculate the return (in percent) for each value of b. (Note: you may just calculate the total return and not worry about how this is split up between current yield and capital-gains yield.)

b.Calculate the expected return.
Suppose an investor has a choice between buying this security or purchasing a different
b.(Note: you may just calculate the total return and not worry about how this is split up between current yield and capital-gains yield.)

c.Suppose an investor has a choice between buying this security or purchasing a different security that also costs $5,000 today, but pays off $5,500 with certainty in one year.How is an investor's choice of which security to purchase related to her degree of risk aversion?

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Definitions:

Decision Making

The cognitive process of choosing between different alternatives or options, crucial in both consumer behavior and organizational strategy.

Product Categorization

The process by which products are classified into different categories or groups based on their characteristics or attributes.

Positioning Strategy

A marketing approach aiming to create a distinct brand identity and value proposition in the consumer's mind.

Evoked Set

a set of particular brands or products a consumer considers during the decision-making process.