3. Homer has $5,000 in invest. The following are three corporate projects Homer could help finance by buying a $5,000 bond. (Each corporation seeks to fund its project by selling 1,000 such bonds.) The bonds will be paid from the proceeds of the project they fund. There is no other collateral or net worth to fall back upon in case the project proceeds are insufficient to allow a corporation to pay in full. Project A Payout 7% with certainty 15% with a 50% probability and 5% with a 50% probability 15% with a 50% probability and -15% with 50% probability B Each project lasts one year, and each corporation knows the quality (possible payouts and their probabilities) of its project. Homer is risk neutral, and the current rate on FDIC insured 1-year bank certificates of deposit is 6%. a. b. (9 points.) Which projects should receive financing? Which should not? Briefly explain for each. (9 points.) Suppose that Homer knows that the projects have the payouts described above. However, Homer cannot determine which corporation's bond has which payout. So, if Homer buys a bond with his $5,000, he has an equal probability of buying a bond financing Project A, Project B, or Project C, assuming all three firms issue bonds. Before investing, Homer puts on his glasses and performs the following exercise: (Fill in the table for Homer.) Expected Yield on those Bonds Issued at this Promised Yield Promised Yield Which Firm(s) Issue Bonds? 6% 11% 14% c. Based on your computations in part (b), are bonds or bank certificates of deposit more attractive to Homer given the asymmetric information about project quality. Briefly explain. 3. Homer has $5,000 in invest. The following are three corporate projects Homer could help finance by buying a $5,000 bond. (Each corporation seeks to fund its project by selling 1,000 such bonds.) The bonds will be paid from the proceeds of the project they fund. There is no other collateral or net worth to fall back upon in case the project proceeds are insufficient to allow a corporation to pay in full. Project A Payout 7% with certainty 15% with a 50% probability and 5% with a 50% probability 15% with a 50% probability and -15% with 50% probability B Each project lasts one year, and each corporation knows the quality (possible payouts and their probabilities) of its project. Homer is risk neutral, and the current rate on FDIC insured 1-year bank certificates of deposit is 6%. a. b. (9 points.) Which projects should receive financing? Which should not? Briefly explain for each. (9 points.) Suppose that Homer knows that the projects have the payouts described above. However, Homer cannot determine which corporation's bond has which payout. So, if Homer buys a bond with his $5,000, he has an equal probability of buying a bond financing Project A, Project B, or Project C, assuming all three firms issue bonds. Before investing, Homer puts on his glasses and performs the following exercise: (Fill in the table for Homer.) Expected Yield on those Bonds Issued at this Promised Yield Promised Yield Which Firm(s) Issue Bonds? 6% 11% 14% c. Based on your computations in part (b), are bonds or bank certificates of deposit more attractive to Homer given the asymmetric information about project quality. Briefly explain