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Hi Shannon - Strictly speaking, the Merton gives us no direct way to do that conversion, is sort of the the point. The Merton is limited to inferring a PD from a future distribution, either 1- year or 5-year or whatever SINGLE time horizon (that is less than or equal to the maturity of the long term debt). If we want the 1-year, we need to "re-run" the Merton under a one-year drift & one-year volatility (i.e., using T = 1.0 year).

Of course, if Merton gives us a 5-year cumulative PD, we can receive the 5-year PD estimate given by Merton, assume it to be a 5-year cumulative PD (which is an approximation and technically confuses the Merton output with a cumulative PD) and further assume constant annual conditional PD, and then use: 1-year conditional PD = 1 - (1- 5yr PD)^(1/5). Or for that matter, we can infer a hazard rate = LN(1 - 5 yr cum)*-1/T. So, we have can resort to our usual mechanics, but we've left the Merton to do that. Thanks,

**Nothing stops us from running the Merton at both T = 1.0 and (eg) T = 5.0 years.**Of course, if Merton gives us a 5-year cumulative PD, we can receive the 5-year PD estimate given by Merton, assume it to be a 5-year cumulative PD (which is an approximation and technically confuses the Merton output with a cumulative PD) and further assume constant annual conditional PD, and then use: 1-year conditional PD = 1 - (1- 5yr PD)^(1/5). Or for that matter, we can infer a hazard rate = LN(1 - 5 yr cum)*-1/T. So, we have can resort to our usual mechanics, but we've left the Merton to do that. Thanks,

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