If a bond has an annual probability of default of 6%, 10% and 12% in years...
If a bond has an annual probability of default of 6%, 10% and 12% in years 1, 2 and 3 respectively, what is the probability that it will not be in default at the end of year 3?
Show how you derived your answer.
Homework Answers
To calculate probability of no default at the end of third year. Issuer shall not default in year 1 and year 2 also.
Probability of not default in year3=(1-6%)*(1-10%)*(1-12%)
Probability of not default in year 3 = 74.45%.
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