Mathematics

Roman

27 October, 22:53

Rating at Beginning of Period

Rating at End of Period

Rating at End of Period

Rating at End of Period

Rating at End of Period

A

B

C

As a result of the credit crunch, a small retail bank wants to better predict and model the likelihood that its larger commercial loans might default. It is developing an internal ratings-based approach to assess its commercial customers. Given this one-year transition matrix, what is the probability that a loan currently rated at B will default over a two-year period?

Rating at Beginning of Period

Rating at End of Period

Rating at End of Period

Rating at End of Period

Rating at End of Period

A

B

C

Default

A

0.90

0.10

0.00

0.00

B

0.00

0.75

0.15

0.10

C

0.0

0.05

0.55

0.40

A. 17.5%

B. 20.0%

C. 21.1%

D. 23.5%