This problem utilizes the Mortality Rate Derivation of Credit Risk. This is a more modern method used to model credit risk. The mortality rate approach is used to evaluate loans or bonds of similar quality. Typically, it is used to calculate loan or bond survivability during consecutive years. There is calculation needed for this problem. Look in the chart in problem #3. Find the Cumulative Default Rate for three years based on the loan requested in the problem and compare it to the Maximum Allowable Default Probability listed at the top of the case study. Please write a paragraph explaining whether or not you should accept or reject the loan and why.

An A-rated corporate loan with a maturity of three years. A-rated corporate loans are evaluated using the mortality rate approach. A schedule of historical defaults (annual and cumulative) experienced by the bank on its A-rated corporate loans is as follows:

Loan type	1 year	2year	3 year	4 year
A rated corporate loans
Annual default	0.10%	0.25%	0.40%	0.65%
Cumulative default	0.10	0.325	0.595	1.858