Answer: 4.5%

## 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%**.

Author: LeetQuiz Editorial Team