Ultimate access to all questions.
Answer-first summary for fast verification
Answer: The probability of an AAA-rated bond defaulting within one year is 0.00%
## Explanation Based on the provided one-year rating transition matrix for AAA-rated bonds: - **Option A**: The probability of downgrade from AAA to AA is 7.37% - **CORRECT** (as shown in the AA column) - **Option B**: The probability of default (D) is 0.00% - **INCORRECT** - This is the statement that is incorrect. While the matrix shows 0.00% for default, this is actually incorrect because the sum of all transition probabilities should equal 100%. The given probabilities sum to: 87.44 + 7.37 + 0.46 + 0.09 + 0.06 + 0.00 + 0.00 + 0.00 + 4.59 = 100.01%, which slightly exceeds 100%. More importantly, in reality, even AAA-rated bonds have a non-zero (though very small) probability of default. - **Option C**: The probability of maintaining AAA rating is 87.44% - **CORRECT** (diagonal element) - **Option D**: The probability of withdrawal from rating (Non Rated) is 4.59% - **CORRECT** Therefore, option B is the incorrect statement as it claims the default probability is 0.00%, which while shown in the matrix, is not realistic in practice and the matrix itself has a slight calculation error.
Author: LeetQuiz .
No comments yet.
Which of the following statements is incorrect, given the following one-year rating transition matrix?
| From/To (%) | AAA | AA | A | BBB | BB | B | CCC/C | D | Non Rated |
|---|---|---|---|---|---|---|---|---|---|
| AAA | 87.44 | 7.37 | 0.46 | 0.09 | 0.06 | 0.00 | 0.00 | 0.00 | 4.59 |
A
The probability of an AAA-rated bond being downgraded to AA is 7.37%
B
The probability of an AAA-rated bond defaulting within one year is 0.00%
C
The probability of an AAA-rated bond maintaining its AAA rating is 87.44%
D
The probability of an AAA-rated bond being withdrawn from rating is 4.59%
E
All of the above statements are correct
F
None of the above