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Consider a 1 year, 15% coupon bond with face value of $1500 issued by a public company. The one-year risk-free rate is 15%. The corporation
Consider a 1 year, 15% coupon bond with face value of $1500 issued by a public company. The one-year risk-free rate is 15%. The corporation has hit on hard times, and the consensus is that there is a 20% probability that it will default on its bonds. If an investor were willing to pay at most $1100 for the bonds, is that investor risk-neutral or risk averse?
- Calculate and then say if he is risk averse or neutral.
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