Question 16: Your portfolio consists of two blue bonds: each has a fa…

Your portfolio consists of two blue bonds: each has a face value of 100 units and a probability of default $p_b = 15\%$. The blue bonds are perfectly correlated with each other ($\gamma = 1$). Through securitization, you are able to create two new bonds with face value: a senior bond and a junior bond. When none of the blue bonds defaults, each of the new bonds is paid a face value of 100. If any one of the blue bonds defaults, the senior bond is paid the face value of 100 while the junior bond suffers the loss and is paid 0. In case both the blue bonds default, none of the new bonds pay off. What is the probability that the junior bond will result in default?