Consider a one-year, 10-percent coupon bond with a face value of $1,000 issued by a private corporation. The one-year risk-free rate is 10 percent. The corporation has hit on hard times, and the consensus is that there is a 20 percent probability that it will default on its bonds. If an investor were willing to pay at most $775 for the bond, is that investor risk-neutral or risk averse?
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