The bond pricing model of Chapter 11 is based on the terminal condition P (T, T ) = $1, i.e., the bond payoff at maturity is always equal to $1, and default never occurs. In this chapter we allow for the possibility of default at a random time τ , in which case the terminal payoff of a bond vanishes at maturity. We also consider the credit default options (swaps) that can act as a protection against default.