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In statistics, the hazard rate is the probability that something happens in a given period. Suppose that a company owes you some money and offers
In statistics, the hazard rate is the probability that something happens in a given period. Suppose that a company owes you some money and offers to pay you either now, in one year, or in two years. Suppose also that the hazard rate for this company going bankrupt is constant in each period: 5%. Suppose you are risk neutral. The company owes you $100 now. How much would you be willing to accept in one year and in two years for you to be indifferent between these amounts later and $100 now? Could you model your choice as generated from a Discounted Utility model with a discounting factor d? What would be the value of S
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