Problem #1

You purchase a bond today for $980; M=$1000, the coupon rate is 4% paid semi-annually, and there are years to maturity. If you sell the bond for $1025 in six months time, what is your rate of return?

Problem #2

You can participate in one of two games:

Game 1: Pays $1M with probability 1.0

Game 2: Pays $5M with probability 0.1

Pays $1M with probability 0.89

Pays $0 with probability 0.01

You must quantify your answer and choose a game.