There are two discount bonds in the market both offering $1,518 next year. Bond A is issued by a good corporation with good finances. If you had perfect information and knew about the health of this corporation, you would be willing to offer $1,380 for this bound. Bond B is issued by a high-risk corporation with shaky finances. If you had perfect information and knew about the health of this corporation, you would be willing to offer $1,265 for this bond. But, you don't have any information about the quality of these two companies. You think there is a 50-50 chance that either company could be good or bad. Because of this asymmetric information problem you are willing to charge an interest rate of X percent for the loan to either company. What is X?
There are two discount bonds in the market both offering $1,518 next year. Bond A is issued by a good corporation with good finances. If you had perfect information and knew about the health of this corporation, you would be willing to offer $1,380 for this bound. Bond B is issued by a high-risk corporation with shaky finances. If you had perfect information and knew about the health of this corporation, you would be willing to offer $1,265 for this bond. But, you don't have any information about the quality of these two companies. You think there is a 50-50 chance that either company could be good or bad. Because of this asymmetric information problem you are willing to charge an interest rate of X percent for the loan to either company. What is X?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 9P
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