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Unformatted text preview: loan? 1 C) Compare and explain your answers to A) and B). Problem 4 Consider two randomly selected corporate bonds: A and B. Suppose that the probability that bond A defaults is 0.5. If bond A defaults, the probability that bond B defaults is 0.75, whereas if bond A does not default then the probability that bond B defaults is 0.25. A) What is the probability that bond B will default? B) What is the probability that both bonds will default? C) Let Y be the number of bonds that default. Is Y a binomial random variable? D) What is the probability distribution of Y? Hint: List events that correspond to each possible value of Y and then use the conditional probabilities given in the problem to compute that probabilities that Y will take each of these values. 2...
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 Fall '11
 RomanFrydman
 Economics

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