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question about marginal prob of default

itsyourz

New Member
Hi,

practice exam 08 part I number 38.

I dont understand the solution intuitively

Conditional Probability (24 months / not defaulted during first 12 months) =

(45.6% - 21.5% ) / (1-21.5%)

is it bayes theorem?

denominator is probability of nondefault in first year

and what is numerator?
 

David Harper CFA FRM

David Harper CFA FRM
Staff member
Subscriber
Hi suk,

The answer is unnecessarily complicated. And, no I don't consider that Bayes. The question says monthly marginal PD in year 2 = 3%.

Therefore, marginal (annual) PD in year 2 = 1 - (1-3%)^12 = 30.6%

David
 
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