Question
The following table shows the probability of default (%) for companies starting with a particular credit rating. Time (years) 1 2 3 4 5 7
The following table shows the probability of default (%) for companies starting with a particular credit rating. Time (years) 1 2 3 4 5 7 10 Aaa 0.000 0.013 0.013 0.037 0.104 0.241 0.489 Aa 0.022 0.068 0.136 0.260 0.410 0.682 1.017 A 0.062 0.199 0.434 0.679 0.958 1.615 2.759 Baa 0.174 0.504 0.906 1.373 1.862 2.872 4.623 Ba 1.110 3.071 5.371 7.839 10.065 13.911 19.323 B 3.904 9.274 14.723 19.509 23.869 31.774 40.560 Caa 15.894 27.003 35.800 42.796 48.828 56.878 66.212
What is the probability of a bond initially rated Ba defaulting during the fifth year? 8.955% 10.065% 2.226% 4.694%
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