1. Consider the following financial system with two types of bond issuers. Bonds issued by safe businesses pay a 5 percent return, and there is no chance of default. Bonds issued by risky businesses pay a 20 percent return, but there is a 25 percent probability of default. You do not know the identity of bond issuers, but you know that 60 percent of businesses are safe and 40 percent of businesses are risky.

The expected return of lending to a risky business is _____ percent. If you do not know the identity of the issuer, then the expected return of buying a bond is __________.

2. Life insurance companies' source of funds is _____________, and their primary use of funds is___________.