Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby anbu.edu » Sun Oct 06, 2013 8:02 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?
Choose one answer.
a. 97.4% Correct
b. 97.5% Incorrect
c. 2.5% Incorrect
d. 2.4% Incorrect
The correct answer is 97.4%.
For an annual default rate of dA and assuming a constant default rate, the quarterly default rate dQ satisfies = ( 1- dA ) = ( 1- dQ )4, since dA = 10%, so dQ = 2.6%, and thus the probability of the company surviving for the 2nd quarter is 100% - 2.6% = 97.4%.

I cant follow this explanation..
if DA is .10 then 1-.10=(1-dq)4:.90=4-4dq
Please explain this concept

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


Postby pradeeppdy » Mon Oct 07, 2013 11:11 am

No you are following the wrong formula because the correct formula is (1 - dA ) = ( 1 - dQ )^4
Now do it you will able to find it.

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