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You currently invest in a riskless (guaranteed) zero-coupon mortgage that has a face value of $98M and a market value of $96M. You can invest

You currently invest in a riskless (guaranteed) zero-coupon mortgage that has a face value of $98M and a market value of $96M. You can invest $95M in another mortgage, which is risky (defaultable) but otherwise equivalent to the riskless mortgage you own. Your simulation model suggests that the borrowers default option is worth $2M for this risky mortgage.

Which of the following is a better strategy based on your model?

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