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Consider the same setting as in the previous exercise, only that instead of having income risk, we will assume that endowment in period t +

Consider the same setting as in the previous exercise, only that instead of having income risk, we will assume that endowment in period t + 1 is deterministic, but there is risk of default for one of the bonds. In particular, assume that the so-called risky bond, will pay in full at period t + 1 with a probability p1, will default fully at t + 1 with a probability p2 and will default partially (50% default) at t + 1 with a probability p3 = 1 p1 p2

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