Explanation

To calculate the two-period cumulative probability of default for a B-rated credit, we need to consider all possible paths to default over two periods.

Step 1: First period transitions from B

• B → A: 0.03
• B → B: 0.90
• B → C: 0.05
• B → D: 0.02

Step 2: Second period transitions

Path 1: B → D in first period Probability = 0.02

Path 2: B → A → D Probability = 0.03 × 0.00 = 0

Path 3: B → B → D Probability = 0.90 × 0.02 = 0.018

Path 4: B → C → D Probability = 0.05 × 0.14 = 0.007

Total two-period cumulative default probability: 0.02 + 0 + 0.018 + 0.007 = 0.045 = 4.5%

Therefore, the correct answer is 4.5%.