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Answer: 1.15%
The correct answer is A, which is 1.15%. This is calculated by determining the marginal probability of default for the year 2019. The marginal probability is the change in the cumulative default rate from one year to the next. In this case, the cumulative default rate at the end of 2018 was 4.31%, and at the end of 2019, it was 5.46%. The marginal probability of default for 2019 is therefore the difference between these two rates: \[ \text{Marginal Probability of Default (2019)} = 5.46\% - 4.31\% = 1.15\% \] This calculation is based on the assumption that there were no new issuers added to the rating class during the holding period, and it reflects the additional risk of default that occurred between the end of 2018 and the end of 2019. The other options provided are incorrect as they represent either different time periods or different types of default rates (conditional default rates), which are not what the question is asking for.
Author: LeetQuiz Editorial Team
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Consider a scenario where a risk analyst from a rating agency is conducting a comprehensive evaluation of migration risk by examining the historical defaults within a particular rating category of corporate issuers. At the start of the analysis in 2016, this rating category comprised 348 issuers. The following table illustrates the number of issuers that did not experience defaults by the end of each subsequent year over a three-year period:
| Year | Count of issuers without defaults at year's end |
|---|---|
| 2016 | 348 |
| 2017 | 339 |
| 2018 | 333 |
| 2019 | 329 |
Assuming that no new issuers were added to the rating category during these years, calculate the 1-year marginal probability of default for the year 2019.
A
1.15%
B
1.20%
C
1.72%
D
1.77%
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