Question 3.1. The following simplified credit rating transition matrix (aka, migration matrix) displays one-year conditional probabilities for only two credits (A and B). For example, the A-rated credit has an 80.0% probability of remaining A-rated at the end of the year, and a 20.0% probability III = A of being downgraded to B-rated, but is not expected to default within one year. From year to year, migrations are independent; i.e., the matrix satisfies the Markov property. B D 80% 20% 0% B 10% 70% 20% D 0% 0% 100% A bank has extended a three-year $15.0 million loan to a B-rated corporate borrower. The bank assumes the exposure at default (EAD) is the principal amount of $15.0 million and estimates a 40.0% recovery rate. If the relevant default probability is the three-year cumulative default probability, then what is the expected loss (EL)? a) $1,800,000 b) $2,250,000 c) $3,978,000 d) $4,392,000 Question 3.1. The following simplified credit rating transition matrix (aka, migration matrix) displays one-year conditional probabilities for only two credits (A and B). For example, the A-rated credit has an 80.0% probability of remaining A-rated at the end of the year, and a 20.0% probability III = A of being downgraded to B-rated, but is not expected to default within one year. From year to year, migrations are independent; i.e., the matrix satisfies the Markov property. B D 80% 20% 0% B 10% 70% 20% D 0% 0% 100% A bank has extended a three-year $15.0 million loan to a B-rated corporate borrower. The bank assumes the exposure at default (EAD) is the principal amount of $15.0 million and estimates a 40.0% recovery rate. If the relevant default probability is the three-year cumulative default probability, then what is the expected loss (EL)? a) $1,800,000 b) $2,250,000 c) $3,978,000 d) $4,392,000