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Considering the transition matrix below, what is the probability that a bond initially rated B will...

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Question

Advance Math

Considering the transition matrix below, what is the probabilitythat a bond initially rated B will be in default (rating D) at theend of two years? Show how you derived youranswer.                     

A

B+

B

B-

C

D

A

0.94

0.03

0.02

0.01

0

0

B+

0.01

0.86

0.05

0.04

0.03

0.01

B

0.01

0.02

0.82

0.07

0.05

0.03

B-

0

0.03

0.05

0.78

0.06

0.08

C

0

0

0.06

0.06

0.7

0.18

Answer & Explanation Solved by verified expert
4.1 Ratings (838 Votes)
We first fill the incomplete transition matrix noting that thesum of each column should    See Answer
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