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Question: You can choose to undertake two mutually exclusive projects: Project 1 will return in one year a payoff of 120 with probability 10%, or a 0 payoff with 90% probability. Project 2 will return in one year a risk-free payoff of 15. Both projects require an initial investment of 10. You do not have any money and need to raise it from external debt holders. Assume that everybody is risk-neutral, that the risk-free interest rate is 0 and that bond holders act competitively. What is the face value of the one-year maturity zero-coupon bond at which bond holder will be willing to lend you the 10 amount you need to start the one project you select?

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Category:- Basic Finance
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