Question

The following table shows the probability of default (%) for companies starting with a particular credit rating. Time (years) 1 2 3 4 5 7 10 Aaa 0.000 0.013 0.013 0.037 0.104 0.241 0.489 Aa 0.022 0.068 0.136 0.260 0.410 0.682 1.017 A 0.062 0.199 0.434 0.679 0.958 1.615 2.759 Baa 0.174 0.504 0.906 1.373 1.862 2.872 4.623 Ba 1.110 3.071 5.371 7.839 10.065 13.911 19.323 B 3.904 9.274 14.723 19.509 23.869 31.774 40.560 Caa 15.894 27.003 35.800 42.796 48.828 56.878 66.212 Which of the statements is correct? Choose all that apply. Read here 1. The probability that a bond initially rated Aa will default during the first year is 0.022%. 2. The probability that a bond initially rated Baa will default by the end of the seventh year is 2.872% .... wink wink

Answer 1

Year	Credit Rating
	AAA	AA	A	BAA	BA	B	CAA
1	0.000	0.022	0.062	0.174	1.110	3.904	15.894
2	0.013	0.068	0.199	0.504	3.071	9.274	27.003
3	0.013	0.136	0.434	0.906	5.371	14.723	35.800
4	0.037	0.260	0.679	1.373	7.839	19.509	42.796
5	0.104	0.410	0.958	1.862	10.065	23.869	48.828
7	0.241	0.682	1.615	2.872	13.911	31.774	56.878
10	0.489	1.017	2.759	4.623	19.323	40.560	66.212
From the credit rating table provided above the below statement provided below is correct and showed as highlighted in table
1. The probability that a bond initially rated Aa will default during the first year is 0.022%seventh year is 2.872% .
2. The probability that a bond initially rated Baa will default by the end of the seventh year is 2.872%.
Hence both the statement are correct.