An Ireland economy with two opposing factions: the Belgium and the Germany. There is one bank, the cross Bank, that will only loan money to the faction that is currently winning the war. The bank holds $70B in reserves, $290B in loans, $180B in investments in zero coupon bonds. They have taken in $400B in deposits. Because Germany is currently winning the war, all of the banks investments are in 2yr zero coupon bonds sold by the Germany. The reserve ratio is 20%. The Germany is considering strengthening their army at a cost of $50B. The market interest rate on bonds is 4% and the face value of every bond is $1000. One year later, the Belgium attacked and their advantage in arrows allowed them to conquer the Germany. Due to this, the Germany defaulted on their bonds that was used to finance the army so they did not repay the bank. They continued to repay all their other bond obligations. QUESTION More than 100 years after, the Belgium have become lazy and other kingdoms are planning to takeover them secretly. The Cross Bank learned its lesson from the previous war, so they wanted to lend every kingdom in the war. One kingdom, Switzerland, has managed to bring others together and they believed that a loan of $110B will enable them to defeat the Belgium who are vulnerable since they can't use their arrows anymore. People who could potentially lend are still skeptical of them because they believe that there is a 50% probability that the Switzerland will be defeated and default on their Bond obligations. What is the price that investors are willing to pay for the bond?
An Ireland economy with two opposing factions: the Belgium and the Germany. There is one bank, the cross Bank, that will only loan money to the faction that is currently winning the war. The bank holds $70B in reserves, $290B in loans, $180B in investments in zero coupon bonds. They have taken in $400B in deposits. Because Germany is currently winning the war, all of the banks investments are in 2yr zero coupon bonds sold by the Germany. The reserve ratio is 20%. The Germany is considering strengthening their army at a cost of $50B. The market interest rate on bonds is 4% and the face value of every bond is $1000. One year later, the Belgium attacked and their advantage in arrows allowed them to conquer the Germany. Due to this, the Germany defaulted on their bonds that was used to finance the army so they did not repay the bank. They continued to repay all their other bond obligations. QUESTION More than 100 years after, the Belgium have become lazy and other kingdoms are planning to takeover them secretly. The Cross Bank learned its lesson from the previous war, so they wanted to lend every kingdom in the war. One kingdom, Switzerland, has managed to bring others together and they believed that a loan of $110B will enable them to defeat the Belgium who are vulnerable since they can't use their arrows anymore. People who could potentially lend are still skeptical of them because they believe that there is a 50% probability that the Switzerland will be defeated and default on their Bond obligations. What is the price that investors are willing to pay for the bond?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:BACKGROUND INFO
An Ireland economy with two opposing factions: the Belgium and the Germany.
There is one bank, the cross Bank, that will only loan money to the faction that is
currently winning the war. The bank holds $70B in reserves, $290B in loans, $180B
in investments in zero coupon bonds. They have taken in $400B in deposits.
Because Germany is currently winning the war, all of the banks investments are in
2yr zero coupon bonds sold by the Germany. The reserve ratio is 20%. The
Germany is considering strengthening their army at a cost of $50B. The market
interest rate on bonds is 4% and the face value of every bond is $1000. One year
later, the Belgium attacked and their advantage in arrows allowed them to conquer
the Germany. Due to this, the Germany defaulted on their bonds that was used to
finance the army so they did not repay the bank. They continued to repay all their
other bond obligations.
QUESTION
More than 100 years after, the Belgium have become lazy and other kingdoms are
planning to takeover them secretly. The Cross Bank learned its lesson from the
previous war, so they wanted to lend every kingdom in the war. One kingdom,
Switzerland, has managed to bring others together and they believed that a loan of
$110B will enable them to defeat the Belgium who are vulnerable since they can't
use their arrows anymore. People who could potentially lend are still skeptical of
them because they believe that there is a 50% probability that the Switzerland will
be defeated and default on their Bond obligations. What is the price that investors
are willing to pay for the bond?
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