Consider two bonds, HI and LI. The HI bond has a 10% coupon rate and the LI bond has a 5% coupon rate. Both bonds pay interest annually and are priced to yield 10%. Suppose the following interest scenarios are possible at the point in time when both bonds have five years remaining to maturity:

a. Calculate the expected value for each bond.

b. Calculate the standard deviation of possible values for each bond.

c. Which bond is riskier? Why?

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Possible Interest Rate Probability of Interest Rate 5% 10 15 10% 50 40