Answer to Question #64213 in Macroeconomics for Teresa
For the next two questions, assume that risk neutral investors decide whether to invest in a risk-free bond with interest rate i0 or a government bond with default risk. With probability ω investors lose their investment in the government bond (including the interest payment). With probability 1 − ω investors receive interest rate i. Mark the correct statements.
4. The arbitrage equation of investors can be written as:
(c) ω+i0 =(1−ω)i
(d) i = i0+ω 1−ω
The arbitrage equation of investors can be written as (a) (1+i)=(1−ω)(1+i0)