Financial Risk Manager Part 2
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A junior risk analyst at an investment bank is using a rating migration matrix to calculate the default probability of a corporate bond issuer. The 1-year credit migration matrix is presented below:
| Current rating | Rating in the next period | | | |
|----------------|---------------------------|-------|-------|--------|
| | A | B | C | Default|
| A | 90% | 8% | 0% | 2% |
| B | 5% | 76% | 10% | 9% |
| C | 1% | 14% | 69% | 16% |
Which of the following statements is correct?
A
A corporate bond that is currently rated A, and maintains the same rating up to the end of year 1, has a 1.8% chance of default in year 2.
B
A corporate bond that is currently rated B, and maintains the same rating up to the end of year 1, has an 8.1% chance of default in year 2.
C
A corporate bond that is currently rated B will default over a 2-year period with a probability of 15.9%.
D
A corporate bond that is currently rated C will default over a 2-year period with a probability of 27.0%.