Question

1. Suppose that an Exxon Mobil bond has a return of 22​% half the time and 14​% the other half. The expected return on this bond is ____%

2. When Google stock has a lower expected​ return, relative to alternative​ assets, due to poor business​ choices, the demand for the alternative assets​ (substitutes) A. declines B. remains the same C. rises

3. If a​ one-year discount bond that pays $1,000 at​ maturity, is held for the entire​ year, and the purchase price is ​$965, then the interest rate is ___%

4. A​ one-year discount bond for which the owner pays ​$937, holds it for the entire one​ year, and receives $1,000 at​ maturity, generates an interest rate of __%

Answer 1

Question 1

Probability of return of 22% = 0.50

Probability of return of 14% = 0.50

Calculate the expected return -

Expected return = [Return of 22% * Probability of return of 22%] + [Return of 14% * Probability of return of 14%]

Expected return = [22 * 0.50] + [14 * 0.50] = 11 + 7 = 18%

Thus,

The expected return on this bond is 18%.

Question 2

It has been stated that Google stock has a lower expected return relative to the alternative assets.

As Google stock has lower expected return relative to the alternative assets, investors will prefer alternative assets.

Due to this, the demand for the alternative assets will rise.

Hence, the correct answer is the option (C).