Suppose you have 10,000 to invest. A broker phones you with some information you requested on certain junk bonds. If the company issuing the bonds posts a profit this year, it will pay you a 40% interest rate on the bond. If the company files for bankruptcy, you will lose all you invested. If the company breaks even, you will earn a 10% interest rate. Your broker tells you there is a 50% chance that they will break even and a 20% chance that the company will file for bankruptcy. Your other option is to invest in a risk- free government bond that will guarantee 8% interest for 1 year.

a) What is the expected interest rate for the junk bond investment?

b) Which investment will you choose if your utility function is given by = ?

c) Which investment will you choose if your utility function is given by = ?