Consider an economy with three types of bonds. All three bonds have the same characteristics, except for the identity of

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Consider an economy with three types of bonds. All three bonds
have the same characteristics, except for the identity of the
issuer. Bond A is issued by the U.S. treasury and pays a nominal
interest rate of iA = 3%. Bond B is issued by a solid company
listed in the S&P 500 index and pays a nominal interest rate iB
= 5%. Bond C is issued by a small company struggling to survive
amidst the effects of the Coronavirus pandemic. The market thinks
bond C has a probability of default of pC = 20%. 1. Compute bond
B’s risk premium, xB, and its probability of default, pB. 2.
Compute bond C’s risk premium, xC, and the rate of return it offers
to investors, iC. 3. You are an investor interested in maximizing
the expected return of buying bonds. Which bond would you choose to
buy and why?