**Question 11**
Given the following transition matrix, what is the two-period cumulative probability of default for a B credit?
| Starting Rating | Ending Rating |
|-----------------|---------------|
| | A | B | C | D |
| A | 0.92 | 0.08 | 0.00 | 0.00 |
| B | 0.05 | 0.82 | 0.08 | 0.05 |
| C | 0.02 | 0.12 | 0.68 | 0.18 |
| D | 0.00 | 0.00 | 0.00 | 1.00 | | Financial Risk Manager Part 1 Quiz - LeetQuiz
Financial Risk Manager Part 1
Explanation:
The two-year cumulative probability of default (PD) = PD Year 1 + PD Year 2
PD Year 1 = 0.05 (as the company is currently rated B)
PD Year 2 = probability (A × D) + (B × D) + (C × D)
