Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

Question

Quizplus · Accepted Answer

The unconditional PD for the fourth year is 14.5% minus 10% or 4.5%.The probability of no earlier default is 90%.The PD conditional on no earlier default is therefore 0.045/0.9=0.05 or 5%

Suppose That the Cumulative Probability of a Company Defaulting by Years