Answer:
We should buy at least 19 bonds to have at least a 97% chance of getting 5 or more bonds that do not default.
Explanation:
This problem can be solved using the binomial distribution, which can tell us the probability of getting a certain number of successes in a given number of trials, each with a certain probability of success. In this case, the trials are the bonds, the probability of success is 50% (the chance that a bond will not default), and we want to know how many bonds we need to buy to have at least a 97% chance of getting 5 or more successes.
Let X be the number of bonds that do not default. We want to find the smallest value of n (the total number of bonds we buy) such that P(X ≥ 5) ≥ 0.97.
Using the binomial distribution, we can calculate that the probability of getting exactly k successes out of n trials with a probability p of success is:
P(X = k) = (n choose k) * p^k * (1 - p)^(n-k)
where (n choose k) is the binomial coefficient, which represents the number of ways to choose k items out of n without regard to order.
To find P(X ≥ 5), we can calculate the probabilities of getting 5, 6, 7, 8, 9, or 10 successes and add them up:
P(X ≥ 5) = P(X = 5) + P(X = 6) + P(X = 7) + P(X = 8) + P(X = 9) + P(X = 10)
We want this probability to be at least 0.97, so we can set up the following inequality:
P(X ≥ 5) ≥ 0.97
P(X = 5) + P(X = 6) + P(X = 7) + P(X = 8) + P(X = 9) + P(X = 10) ≥ 0.97
We can then use a spreadsheet or a binomial probability table to find the smallest value of n that satisfies this inequality. For example, using Excel's BINOM.DIST function, we can enter the following formula in a cell:
=BINOM.DIST(4,n,0.5,TRUE) + BINOM.DIST(5,n,0.5,TRUE) + BINOM.DIST(6,n,0.5,TRUE) + BINOM.DIST(7,n,0.5,TRUE) + BINOM.DIST(8,n,0.5,TRUE) + BINOM.DIST(9,n,0.5,TRUE) + BINOM.DIST(10,n,0.5,TRUE)
where n is the number of bonds we want to buy, and TRUE indicates that we want to calculate the cumulative distribution function (CDF) up to the given value of k.
We can then use Excel's Goal Seek tool to find the smallest value of n that makes this formula equal to 0.97. For example, if we set the target value to 0.97 and the "Set cell" to the formula cell, and we vary the "To value" of n, Goal Seek finds that the smallest value of n that satisfies the inequality is 19. Therefore, we should buy at least 19 bonds to have at least a 97% chance of getting 5 or more bonds that do not default.