1. Consider a 1000-face-value, 3-year bond with 8% annual coupons bought with a 12% eective annual

yield where the coupons will be paid with 100% certainty, but it is only 90% certain that the redemption

value will be paid.

(a) Find the price of the bond as the expected present value.

(b) Find the standard deviation of the present value.

2. Use the bond from the previous problem, but assume that the redemption value will be paid with 100%

certainty and each coupon payment is independently paid with 90% certainty.

(a) Find the price of the bond as the expected present value.

(b) Find the standard deviation of the present value.