1. A bond will pay off $100 with probability 99% and will pay off nothing with probability 1%. The equivalent risk-free rate of return is 5%. What is an appropriate promised yield on this bond?
2. An L.A. Lakers bond promises an investment rate of return of 9%. Time-equivalent Treasuries offer 6%. Is this necessarily a good investment? Explain.
3. A Disney bond promises an investment rate of return of 7%. Time-equivalent Treasuries offer 7%. Is the Disney bond necessarily a bad investment? Explain.