Probability of non-default

ashishsinha
Good Student
Posts: 12
Joined: Mon Jul 01, 2013 5:45 pm

Probability of non-default

Postby ashishsinha » Wed Aug 21, 2013 2:03 pm

Company incorporated on January 1, 2004. Expected annual default rate 10%.Assuming constant quarterly default rate, the probability that it will not default by April 1, 2004.

vighnesh.mehta
Good Student
Posts: 16
Joined: Tue Sep 03, 2013 1:16 pm

Probability of non-default

Postby vighnesh.mehta » Wed Sep 04, 2013 3:35 am

Let the probability of not defaulting in 1 quarter is (nd). Then the probability of not defaulting for a full year is (nd)4. This implies that the probability of defaulting within 1 year time is {1-(nd)4}, which is given as 10%.
1-(nd)4=0.1 which implies
(nd)=0.91/4
= 97.4%


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