Jay is an economics professor who’s planning his future retirement. He knows that he lives for 2 periods and has $150 thousands in disposable income in period 1 and no wage income in period 2. He has quadratic utility U = 200c − 0.5c^2,where c is measured in thousands, and both ρ = r = 0. He is considering an investment opportunity– to purchase 1 thousand junk grade “C” Greece government debt zero-coupon bonds with a face value of $100 for only $50 each. The bonds mature at their face value in period 2. The problem is that there exists a 40% chance that Greece will default at the end of period 1, and thus he will lose his investment.
1. Should he take that opportunity?