Explanation:
In year 4, we have 185 non-defaulted issuers. But initially, we had 230 issuers.
| Year 1 | Year 2 | Year 3 | Year 4 | |
|---|---|---|---|---|
| No. of issuers | 230 | 215 | 190 | 185 |
| No. of defaults | 0 | 15 | 25 | 5 |
| Cumulative defaults | 15 | 40 | 45 | |
| Marginal probability of default |
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Q.5433 Alex Jones is a risk manager at ABC Bank. He is analyzing the number of corporate issuers and defaults over the last four years. He has collected the following information:
| Year | No. of non-defaulted issuers |
|---|---|
| Year 1 | 230 |
| Year 2 | 215 |
| Year 3 | 190 |
| Year 4 | 185 |
What is the estimated 1-year marginal probability of default in year 4, assuming no new issuers were introduced during the holding period?
A
6.52%
B
10.87%
C
8.11%
D
2.17%
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