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|Description / paper instructions
Answer the questions on the problem set that I uploaded. It requires lecture 1-3’s stuffs, so i uploaded the notes as well.
Lecture 1-3 STUDY GUIDE
EC 370 Money and Banking
MTWR 2:00-3:50 pm, MCK 240C
PROBLEM SET 1
Please not that you may work with other students on the homework, but you must turn in your own work. No late assignments will be accepted. Keep your answer within the space provided below the questions.
Choose 2005 as the base year. Answer the following questions
Option 1: Put the money in an interest-bearing checking account, which earns 2%. The FDIC insures the account against bank failure.
Option 2: Invest the money in a corporate bond, with a stated return of 5%, but there is a 10% chance the company could go bankrupt.
Option 3: Loan the money to one of your friends’ roommates, Drizella, at an agreed-upon interest rate of 8%, but you believe there is a 7% chance that Drizella will leave town without repaying you.
Option 4: Hold the money in cash and earn zero return.
If you are risk-neutral (that is, neither seek out nor shy away from risk), which of the four options should you choose to maximize your expected return?