Quants- probability

darshit.sr
Posts: 7
Joined: Fri May 17, 2013 5:53 pm

Quants- probability

Postby darshit.sr » Thu Oct 17, 2013 11:28 am

Company ABC was incorporated on January 1, 2004. it has expected annual default rate of 10%. Assuming a constant quarterly default rate, what is the probability that company ABC will not have defaulted by April 1, 2004?
a. 97.4%
b. 97.5%
c. 2.5%
d. 2.4%

pradeeppdy
Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm

Quants- probability

Postby pradeeppdy » Fri Oct 18, 2013 5:39 am

Expected annual default rate is given 10% and here we need to find out quarterly default rate. So we put this formula,
(1 – dA) = (1 – dQ)^4
after solving this we will see dQ is 2.6%.
( 100% - 2.6% ) = 97.4%, Probability that the company ABC will not have defaulted by any Quarter.


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