Answer to Question #64213 in Macroeconomics for Teresa

Question #64213
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: (a) (1+i)=(1−ω)(1+i0) (b) (1+i0)=(1−ω)(1+i) (c) ω+i0 =(1−ω)i (d) i = i0+ω 1−ω (e) i+ω=(1−ω)i0
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Expert's answer
2016-12-18T10:01:09-0500
The arbitrage equation of investors can be written as (a) (1+i)=(1−ω)(1+i0)

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