Question
This is Information needed for all questions. -For the first seven questions, consider the economy of Columbia.In this economy, there are three firms potentially interested
This is Information needed for all questions.
-For the first seven questions, consider the economy of Columbia.In this economy, there are three firms potentially interested in issuing a $100,000 bond to do a project each hopes will be profitable:
The Heckle Firm has a 70% chance of a $150,000 return.
The Ickle Firm has an 80% chance of a $140,000 return.
The Jackle Firm is credibly guaranteed to get a $100,000 return.
The only other possibility for all firms is failure, a $0 return.Assume that these firms will issue bonds as long as savers want them.
The question
-Continuing with the information about Columbia:
Now, we enter Stage One, where information is asymmetric, but bond buyers assume no firms have yet left the market as a result.Because information is asymmetric, bond buyers demand a return of 15% ($115,000 total) to buy the bond.
What is the required minimum potential return bond buyers will demand to buy bonds under these conditions, taking into account firm risk?Carefully follow all numeric instructions.
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