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3. (20 marks) Consider the following one-year rating transition matrix. Rating from A B C Default A Rating to B C Default 57.09% 29.30%

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3. (20 marks) Consider the following one-year rating transition matrix. Rating from A B C Default A Rating to B C Default 57.09% 29.30% 7.89% 5.72% 28.35% 50.41% 10.47% 10.77% 13.41% 27.90% 19.78% 38.91% 0.00% 0.00% 0.00% 100.00% (a) (4 marks) Interpret the numbers in the first column of the transition matrix. That is, 57.09%, 28.35%, 13.41%, and 0.00%. (b) (8 marks) What is the probability that a company rated B will NOT default within three years?

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