Klawz Bear desires a new BEAR CAVE on the UNC Campus. There are two options $-$ a high risk and lower risk design. He has raised $$4,000$ in capital $(1/2$ stock $|1/2$ bonds w$/1$yr maturity and $7\%$ coupon$).$

$--$ The Low Risk: $$4,800$ anticipated value $1yr$ in good mkt and $$3,800$ if mkt declines. Good $50\%|$ Declining $50\%.$ Cash earned will allow Bondholders to be repaid in full with excess to the stockholders.

$--$ The High Risk: $$6,850$ anticipated value $1yr$ in good mkt and $$0$ if mkt declines. Good: Unsure $|$ Declining: Lose ALL Cash earned will allow Bondholders to be repaid in full with excess to the stockholders.

The Bondholders Expected Rate of Return for the Low Risk Project is calculated to be:

$8\%$

$-46\mathrm{.}50\%$

$17\mathrm{.}75\%$

$7\%$