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    NEW QUESTION: 1





    A. R1-0%
    B. R1-50 %, R2-50%
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    Answer: D

    NEW QUESTION: 2
    A corporate bond has a cumulative probability of default equal to 20% in the first year, and 45% in the second year. What is the monthly marginal probability of default for the bond in the second year, conditional on there being no default in the first year?
    A. 2.60%
    B. 31.25%
    C. 15.00%
    D. 3.07%
    Answer: D
    Explanation:
    Explanation
    Note that marginal probabilities of default are the probabilities for default for a given period, conditional on survival till the end of the previous period. Cumulative probabilities of default are probabilities of default by a point in time, regardless of when the default occurs. If the marginal probabilities of default for periods 1, 2... n are p1, p2...pn, then cumulative probability of default can be calculated as Cn = 1 - (1 - p1)(1-p2)...(1-pn).
    For this question, we can calculate the marginal probability of default for year 2 by solving the equation [1 - (1
    - 20%)(1 - P2) = 45%] for P2. Solving, we get the marginal probability of default during year 2 as 31.25%.
    Since this is the annual marginal probability of default, we will need to convert it to a monthly number, which we can do by solving the following equation where M1 is the monthly marginal probability of default.
    1 - 31.25% = (1 - M1)

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