Firms with safe and risky projects exist in equal numbers A safe investment of $100 turns into $110 with certainty A risky investment is equally likely to turn $100 into $212 or $0 Everyone is risk neutral and the risk free rate is 4 percent Is the safe project efficient Is the risky project efficient Start by assuming symmetric information Does the market for safe bonds exist Does the market for risky bonds exist In equilibrium, putting $100 into safe bonds buys how much face value How about risky bonds

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Question: Firms with safe and risky projects exist in equal numbers. A safe investment of $100 turns into $110 with certainty. A risky investment is equally

Firms with safe and risky projects exist in equal numbers. A safe investment of $100 turns into $110 with certainty. A risky investment is equally likely to turn $100 into $212 or $0. Everyone is risk-neutral and the risk-free rate is 4 percent.

Is the safe project efficient? Is the risky project efficient?

Start by assuming symmetric information.

Does the market for safe bonds exist? Does the market for risky bonds exist?

In equilibrium, putting $100 into safe bonds buys how much face value? How about risky bonds?

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