Question

the probability of default on a "bad" bond is 30%. Determine the number of bonds you should buy if you want to meet your goal of having a 95% chance of getting three "good" bonds.

Answer 1

For the binomial distribution with p=0.7, n=6:

$P(X\ge3)=0.9295.$

For the binomial distribution with p=0.7, n=7:

$P(X\ge3)=0.9712.$

Thus, you should buy 7 bonds.