Where should the depositor put the money

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Reference no: EM132836861

Problem 1: In Depositor versus Saving & Loan Association (S&L), suppose that the S&L can invest $100,000 in a junk bond (the official name for this sort of security is high-yield bond) with the following rates of return: with high effort (H represents high research effort), the probability is 0,98 that the rate of return is 15% and 0.02 that the money vanishes; with low effort (L represents low research effort), the probability is 0.92 that the rate of return is 15% and 0.08 that the money vanishes. The rate of return on government bonds is 4%. After paying off the depositor, the S&L is left with $2000 minus research cost. Draw the extensive form and solve. Where should the depositor put the money?

Reference no: EM132836861

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