5% default rate implies $100 \times 5% = 5$defaults in the first year. Defaults in the second year = `$5\% \times (100 - 5) = 4.75$ Defaults in the third year = $5`\% \times (95 - 4.75) = 4.5125$
Defaults in the fourth year = $5% \times (90.25 - 4.5125) = 4.2869$Defaults in the fifth year = `$5`% \times (85.7375 - 4.2869) = 4.0725$
That’s approx. 4 defaults in year 5.

Things to Remember

• Default rate is the percentage of loans that are expected to default within a given period of time.
• Default rate is a key input in credit risk modeling and is used to estimate the number of expected defaults in a loan portfolio.
• Default rate can be influenced by various factors such as economic conditions, borrower creditworthiness, and industry-specific risks.
• Default rate is an important metric for financial institutions to assess the credit risk associated with their loan portfolios.