Based on the credit rating transition matrix given in Table 4, construct the probability distribution of the market value of the bond due to change in credit quality over the next year.

S&Ps 1-year Transition Matrix

Table 4

From/To AAA AA A BBB BB B CCC/C D

AAA 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

AA 0.00% 94.16% 2.60% 0.00% 0.00% 0.00% 0.00% 3.24%

A 0.00% 0.57% 91.30% 5.48% 0.00% 0.00% 0.00% 2.65%

BBB 0.00% 0.13% 3.47% 89.20% 1.80% 0.00% 0.00% 5.40%

BB 0.00% 0.00% 0.00% 3.38% 80.96% 6.94% 0.36% 8.26%

B 0.00% 0.00% 0.00% 0.17% 2.49% 77.18% 5.39% 14.77%

CCC/C 0.00% 0.00% 0.00% 0.00% 0.00% 2.74% 49.32% 47.94%