Suppose you are issuing a zero coupon bond to fund your investment I0=$1. Your (the entrepreneur's) investment is risky with expected payoff E[V]=45I0 and Var[V]=81I02 and is normally distributed. Your expected utility over final payoff is E[VI0(1+r)]Var[VI0(1+r)] There are 3 banks willing to finance with discount rates given by 1% for Bank 1,2% for Bank 2 and 3% for Bank 3 . Each bank gets payoff 1+1+rI0I0. 1. Assume the entrepreneur has no other way to repay but from V. Should the banks be concerned about you (the entrepreneur) defaulting on the loan? Why or why not? 2. Plot the financial payoff of the investment and repayment of the bond paid to the banks over realizations of V (on the x-axis). 3. Ignore any credit risk concerns from here-on. Suppose the bond will be initially issued via an auction (a) Define an appropriate notion of an equilibrium on this exchange (b) What bids (prices) will the banks offer in equilibrium? (c) What is the equilibrium yield? Suppose you are issuing a zero coupon bond to fund your investment I0=$1. Your (the entrepreneur's) investment is risky with expected payoff E[V]=45I0 and Var[V]=81I02 and is normally distributed. Your expected utility over final payoff is E[VI0(1+r)]Var[VI0(1+r)] There are 3 banks willing to finance with discount rates given by 1% for Bank 1,2% for Bank 2 and 3% for Bank 3 . Each bank gets payoff 1+1+rI0I0. 1. Assume the entrepreneur has no other way to repay but from V. Should the banks be concerned about you (the entrepreneur) defaulting on the loan? Why or why not? 2. Plot the financial payoff of the investment and repayment of the bond paid to the banks over realizations of V (on the x-axis). 3. Ignore any credit risk concerns from here-on. Suppose the bond will be initially issued via an auction (a) Define an appropriate notion of an equilibrium on this exchange (b) What bids (prices) will the banks offer in equilibrium? (c) What is the equilibrium yield