Assume that firms have their choice of investment project. A safe investment of $100 turns into $110 with certainty. A risky investment is equally likely to turn $100 into $200 or $0. Everyone is risk neutral and the risk-free rate is 3%. There are 60 identical firms that seek to maximize expected profit. Lenders cannot observe a firms choice of project.

b. In equilibrium, the bond market does not exist. Why?