(See Problem 1

question 6

Multiple Choice

(See Problem 1.) Alice and Betsy are playing a game in which each can play either of two strategies, leave or stay. If both play the strategy leave, then each gets a payoff of $200. If both play the strategy stay, then each gets a payoff of $800. If one plays stay and the other plays leave, then the one who plays stay gets a payoff of $C and the one who plays leave gets a payoff of $D. When is the outcome where both play leave a Nash equilibrium?

• A) When D > C and C > $200.
• B) Never, since $800 > $200.
• C) Whenever D < $800.
• D) When $200 > C and D > $800 but not when $800 >D.
• E) Whenever $200 > C.

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Definitions:

Pure Discount Bond

A type of bond that is sold at a discount to its face value, pays no interest to the holder, and is redeemed at its full face value at maturity.

Risk-Free Rate

The theoretical return on an investment with zero risk, often represented by the yield on government securities.

Face Value

The nominal or dollar value printed on a financial instrument, such as a bond or stock certificate, representing the amount to be paid at maturity or the value of a share.

Straight Bond Value

The present value of a bond's future interest payments and its redemption value at maturity, assuming it has no special features.