Q.3053 Smith Incorporated had an investment in a bond rated Caa by Moody’s. Assume you are a risk analyst at Smith, and you’ve been asked to calculate the probability that the bond will default during the fourth year, conditional on no earlier default. Your calculation based on data in the table below is closest to:

Average cumulative default rates (%), 1970-2012, from Moody’s.

Term (years):	1	2	3	4	5	7	10	15	20
Aaa	0.000	0.013	0.013	0.037	0.106	0.247	0.503	0.935	1.104
Aa	0.022	0.069	0.139	0.256	0.383	0.621	0.922	1.756	3.135
A	0.063	0.203	0.414	0.625	0.870	1.441	2.480	4.255	6.841
Baa	0.177	0.495	0.894	1.369	1.877	2.927	4.740	8.628	12.483
Ba	1.112	3.083	5.424	7.934	10.189	14.117	19.708	29.172	36.321
B	4.051	9.608	15.216	20.134	24.613	32.747	41.947	52.217	58.084
Caa – C	16.448	27.867	36.908	44.128	50.366	58.302	69.483	79.178	81.248