In Question 5 the risky bond paid a certain return of $1,000 and was priced to yield
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In Question 5 the risky bond paid a certain return of $1,000 and was priced to yield a return of 5% and the risky bond had a .75 probability of paying $1,000 and .25 probability of paying $100, for an expected return of $775. Suppose the probabilities of .75 and .25 and possible payoffs of $1,000 and $100 are known with absolute certainty (i.e., no one can question the statistics). Explain why the risky bond could still be priced to yield a rate exceeding 5%.
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