The following represents two yield curves.
$\begin{array} { | l r r | }
\hline \text { Maturity } & \text { Pure Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year } & 3 \text { percent } & 6\text { percent }\
2 \text { year } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What is the cumulative mortality rate of the A-rated and B-rated loans for year 2?

Question

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What is the cumulative mortality rate of the A-rated and B-rated loans for year 2?

Quizplus · Accepted Answer

A-rated loans Cp = (1 - p1) x (1 - p2) = (1 - 0.005) x (1 - 0.005) = (0.995) x (0.995) = 0.9900
So cumulative mortality rate: (1 - Cp) = 1 - 0.990 = 0.01
B-rated loans Cp = (1 - p1) x (1 - p2) = (1 - 0.01) x (1 - 0.0125) = (0.99) x (0.9875) = 0.9776
So cumulative mortality rate: (1 - Cp) = 1 - 0.9776 = 0.0224. The cumulative mortality rate is the percentage of loans that have defaulted by a given point in time. In this case, the cumulative mortality rate for the A-rated loans is 1.0 percent and the cumulative mortality rate for the B-rated loans is 2.24 percent.

The Following Represents Two Yield Curves -What Is the Cumulative Mortality Rate of the A-Rated and r