In the mock exam, you are asked for the joint probability (survival in 1st year AND THEN default in 2nd year => **two events**).

In the real exam, you were asked for the conditional probability (default in 2nd year GIVEN survival in 1st year => **one event**).

In the mock exam, the perspective was from t=0, and in the real exam it was from t=1 because in the real exam, they assumed the firm had not defaulted in year 1, and asked about year 2. And in the mock exam they are just asking about a scenario in years 1 and 2 combined. No information about what happened in first year was given.

Thus, the formula was : **Marginal PD in Year 2 / (1 - Marginal PD in Year 1)**

i.e (**Cumulative PD after 2 years - Cumulative PD after 1 year) / (1 - Cumulative PD after 1 year)**

= { 1-exp[-0.12*2] - (1-exp[-0.12] ) } / {exp[-0.12] }

= { exp[-0.12] - exp[-0.12*2] } / {exp[-0.12] }

= **0.11307956328**

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