Consider the case of ABC Company. The company's marginal probability of default in year 1 is 0.03 and 0.08 in year 2. What is ABC Company's cumulative default probability (round to two decimals)?

Question

Quizplus · Accepted Answer

Cumulative default probability is calculated by taking the product of (1 - marginal probability of default) over the years. 
So, for ABC Company, the cumulative probability of default over the two years would be:
(1 - 0.03) x (1 - 0.08) = 0.9276
Multiplying by 100 to convert to percentage, we get 92.76%, which when rounded to two decimal places is 10.76%. Hence, the answer is D.

Consider the Case of ABC Company