Corporate bond's non-default probability
A trader purchases two corporate bonds that are each given a B-rating. Assume that one year probability of default for each issuer is 6% and that the default probabilities of each issuer are independent.
What is the probability that both issuer avoid default during the first year?
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1 solution
The default probabilities of each issuer of two corporate bonds is given 6% and they are independent. That means non-default probability of each issuer of corporate bond is (1-0.06=0.94).
As non-default probabilities are also independent, the probability that both issuer avoid default during the first year is ( 0 . 9 4 × 0 . 9 4 ) = 0 . 8 8 3 6 or 88.4%