1. Suppose the market value of risky and risk free bonds is initially $850 with a corresponding return of 17.6 %, illustratively discuss the probable reaction of bond buyers and sellers when corporate bonds become riskier to such an extent that the market value of corporate bonds falls to $800 with a corresponding 25% rate of return. If the response of buyers causes the price of risk-free bonds to rise to$900 with a corresponding 11.1 % rate of return, derive the risk premium.