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

To find the cumulative default probability, we need to use the formula:
Cumulative Default Probability = 1 - (1- Marginal Probability of Default Year 1) x (1- Marginal Probability of Default Year 2)
= 1 - (1- 0.03) x (1- 0.08)
= 1 - (0.97 x 0.92)
= 1 - 0.8912
= 0.1088 or 10.88%
Rounding this to two decimals, the answer is D) 10.76%.

Consider the Case of ABC Company