QUESTION 17

The current interest rates for 1-year T-strips and 1-year B-rated corporate strips are 3% and 6%, respectively. The rates for their 2-year strips are 6% and 10%, respectively. If the recovery rate is zero for the bank, what is the cumulative default probability on a B-rated loan in two years?

• A. 4.43%
• B. 7.26%
• C. 4.72%
• D. 7.13%

QUESTION 18

As a loan officer for a finance company, you are considering a loan to an A-rated company. If you use the historical record to estimate the mortality rate for A-rated loans to be 0.5% for both year 1 and year 2 and the cumulative mortality rate in year 3 is 2%, what is the mortality rate of an A-rated loan in year 3?

• A. 1.013%
• B. 0.875%
• C. 0.741%
• D. 1.250%