We will discuss bond defaults in greater detail in Chapter 8. In general, bond defaults tend to be correlated, but under certain circumstances, you may be able to assume that defaults are independent. For example, assume that your firm is considering investing in two bonds. The bonds were issued by different companies, in different industries, and in different countries. The probability of one of these bonds defaulting is independent of the other. Each bond has a 10% probability of defaulting.

What is the probability that both bonds default?That both bonds do not default? That one bond defaults? Construct a probability matrix.