A simplified transition matrix for a portfolio of two-year bonds XYZ with a face value of $20,000,000, is shown below. The bonds have a recovery rate of 45%.

Start rating	End rating
	A	B	C	D
A	0.80	0.14	0.04	0.02
B	0.14	0.80	0.04	0.02
C	0.00	0.18	0.75	0.07
D	0.00	0.00	0.00	1.00

a. If the XYZ bonds are rated A what is the average probability they will default over a two-year period?

%2.08

Round your answer to two decimals.

b. Using the average probability, what is the average annual expected loss using the actuarial method?

c. If the XYZ bonds are rated C what is the cumulative probability of default over the two years period?

d. Using the cumulative probability, what is the expected loss over the two years?