Question 7: Your portfolio consists of two blue bonds: each has a fac…

Your portfolio consists of two blue bonds: each has a face value of 100 units and a probability of default $p_b = 20\%$. The blue bonds are perfectly correlated with each other ($\gamma = 1$). Through securitization, you are able to create two new bonds with face values: a senior bond and a junior bond. When none of the blue bond default both new bonds are paid face value of 100. If any one of the blue bond defaults, the senior bond is paid the face value of 100 while the junior bond suffers the loss and is paid 0. In case of both the blue bonds defaulting, none of the new bonds pays off. What is the expected payoff of the junior bond?