Use the Following to Answer Questions

question 107

Multiple Choice

Use the following to answer questions :
Scenario: Health Costs
Alan is hoping for a healthy year,meaning that he would have zero health costs.Given his habits,there is a 40% chance that Alan will develop a health issue resulting in $50 000 in health costs.Assume these are the only two conditions that could exist for Alan in the coming year.
-(Scenario: Health Costs) Use Scenario: Health Costs.Suppose that Alan decides to change his habits dramatically and,as a result,decreases the probability of his developing a health problem such that he now has a 20% chance of becoming ill.What is the expected value of Alan's health costs now?

• A) $0
• B) $10 000
• C) $20 000
• D) $2 000

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Definitions:

Callable Bond

A type of bond that gives the issuer the right to redeem the bond at a predetermined price before its maturity date.

Yield To Call

The rate of return anticipated on a bond if it is held until the call date, before the bond's maturity date.

Par Value

The face value of a bond or stock, representing the amount the issuer will return to the holder at maturity.

Current Yield

The annual income (interest or dividends) divided by the current price of the security.