1. You are considering purchasing one-year zero-coupon bond issued by firm A. There is no interest payment and you will receive face value 1000 at the end of year 1 (maturity date). The bond issued by firm A is risky and the risk is assumed to be 10. There are another three financial assets in the markets.

Risk free asset B. Risk=0. The expected return of B is 5%.

Risky asset C. Risk=10. The expected return of C is 10%.

Risky asset D. Risk=20. The expected return of D is 20%.

The market equilibrium price (present value) of the one-year zero-coupon bond issued by firm A is ____?

A multiple-choice question with one possible answer.

1. 909
2. 833
3. 952
4. 1000

2. If you invest in Stock A, which has 3 potential outcomes based on economics conditions.

The expected return of Stock A is______?

1. 20%
2. 15%
3. 20%
4. 10%

Economic conditions Strong Normal Weak Probability 30% 40% 30% Return 40% 10% -20%