8:50 Back Document (4).docx Reese has $40,000 that she wishes to invest for one year. She has narrowed down her choices to the following: 1. Buy corporate bonds that will pay 15% interest. If the corporation goes bankrupt, then the principal and interest will be lost. 2. Buy saving bonds that will pay 10% interest Reese assesses her prior probability of the corporation going bankrupt as 20%. The savings bonds will pay off regardless of whether the corporation goes bankruptor not. Reese's utility for money is given by the square root of the amount of her gross payoff. Reese is a rational decision maker. Instructions: Round final numbers to two decimal places. Do not round intermediate calculations. For example, a properly formatted number is 9.45. Numbers incorrectly formatted with not result in any marks. Part A Calculate the expected utility for each action. The expected utility for the corporate bonds is The expected utility for savings bonds is Conclude on whether to invest in corporate bonds or savings bonds. Reese should invest in Part B Before Reese makes her final decision, she obtains the corporation's financial statements and examines the debt to equity ratio. The debt to equity ratio can be either high or low Reese knows the following conditional probabilities: Debt to Equity Ratio Future State LOW Not bankrupt 0.3 10.7 Bankrupt 10.75 Upon calculating the ratio, Reese observes that the debt to equity ratio is low. Calculate the expected utility for each action. The expected utility for the corporate bonds is The expected utility for savings bonds is Conclude on whether to invest in corporate bonds or savings bonds. Reese should invest in Part Reese made a mistake in her debt to equity ratio calculation. The debt to equity ratio was actually high Calculate the expected utility for each action. The expected utility for the corporate bonds is The expected utility for savings bonds is Conclude on whether to invest in corporate bonds or savings bonds. Reese should invest in