A credit risk analyst has estimated the probability of a particular firm defaulting in the next year to be 1.25% using the Merton model. The risk analyst used his bank's definition of the default threshold, namely that default occurs when the firm's value falls below the value of its short term debt plus half the value of its long term debt. Suppose the bank switched from using the Merton model to using the KMV approach to estimate default risk with the following historical expected default frequency buckets (N(-2.24) = 1.25%):

| Distance-to-Default | Expected Default Frequency |

|---------------------|----------------------------|

| < -4 | 0.3% |

| -4 to -3 | 0.3% |