The unconditional default probability between end-of-year 1 and end-of-year 2 is calculated as follows: $Uncon. PD_{1-2} = (1 - e^{-2\% \times 2}) - (1 - e^{-\lambda_1 \times 1}) = e^{-\lambda_1 \times 1} - e^{-2\% \times 2} = 0.9656\%$. We can thus solve the survival rate of the borrower during the first year of the loan, which is $e^{-\lambda_1 \times 1}$: $e^{-\lambda_1 \times 1} = e^{-2\% \times 2} + 0.9656\% = 0.9704$ | Financial Risk Manager Part 1 Quiz - LeetQuiz