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The probability of default of a security during the first year after issuance is 3%, that during the second and third years is 4%, and during the fourth year is 5%. What is the probability that it would not have defaulted at the end of four years from now?
Suggested Answer: D
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The probability that the security would not default in the next 4 years is equal to the probability of survival at the end of the four years. In other words, =(1 - 3%)*(1 - 4%)*(1 - 4%)*(1 - 5%) = 84.93%. Choice 'd' is the correct answer.
45 comments · newest first
KR
Kris
10 months ago
Not sure, but I feel like 84.93% seems low for four years.
EL
Elli
10 months ago
I’m leaning towards option B too!
LE
Lenna
10 months ago
Wait, how does that add up to 88.53%? Sounds off.
LA
Latrice
10 months ago
I think it’s definitely more than 80%.
FR
Frankie
11 months ago
The default probabilities are 3%, 4%, 4%, and 5% for each year.
QU
Queen
11 months ago
I’m uncertain about the exact numbers, but I feel like the answer should be around 88%. I hope I remember the multiplication of the survival probabilities correctly!
LO
Louvenia
11 months ago
I think the key is to find the complement of the default probabilities. I’m leaning towards option B, but I need to double-check my calculations.
MU
Muriel
11 months ago
If I recall correctly, we need to multiply the probabilities of not defaulting each year. I think it’s something like 97% for the first year, but I’m a bit confused about the others.
NO
Novella
12 months ago
I remember we practiced a similar question about default probabilities, but I’m not sure how to calculate the overall probability of not defaulting.
MA
Markus
12 months ago
I'm a little confused by this question. The probabilities for each year are given, but I'm not sure how to combine them to get the overall probability. I'll need to think this through carefully and maybe ask the professor for some guidance.
PO
Pok
12 months ago
Okay, I got this. The key is to find the probability of not defaulting in each year and then multiply them together. Let's see, 3% in the first year, 4% in the second and third years, and 5% in the fourth year. I think the answer is B, 88.53%.
RA
Rachael
1 year ago
Hmm, I'm a bit unsure about how to approach this. I'll need to review my notes on calculating probabilities for multiple events. Maybe I can break it down step-by-step.
JO
Johnetta
1 year ago
This looks like a straightforward probability calculation. I'll need to think through the probabilities for each year and then combine them to get the overall probability of not defaulting.
YO
Yoko
1 year ago
You know, I once had a pet security that defaulted on me. Traumatic experience, let me tell you. Anyway, I'm going with B. 88.53% because it sounds the most secure.
HU
Hubert
1 year ago
Let's go with B) 88.53% then.
EV
Evette
1 year ago
I agree, it seems like the most secure option.
HA
Haley
1 year ago
I think B) 88.53% sounds like a safe bet.
DE
Delbert
1 year ago
This is easy peasy! The probability of not defaulting at the end of four years is clearly D. 84.93%. I'm acing this exam, no doubt about it.
MA
Marylin
1 year ago
Let's double check the calculations to be sure, but I'm sticking with D.
GA
Gail
1 year ago
I'm not so sure, I think it could be B) 88.53%.
JO
Joanne
1 year ago
No way, it's definitely D. 84.93% makes the most sense.
DO
Dorethea
1 year ago
Are you sure it's D? I think it might be A) 12.00%.
JU
Junita
1 year ago
I'm feeling lucky today, so I'm gonna go with A. 12.00%. What could go wrong, right?
EV
Evangelina
1 year ago
User 3: I'm going with D) 84.93%, playing it safe.
JA
Jacqueline
1 year ago
User 2: I'm feeling lucky too, I'll stick with A) 12.00%.
TE
Telma
1 year ago
User 1: I think I'll go with B) 88.53%, seems like a safer bet.
LI
Lindsey
1 year ago
Ooh, this is a tricky one. I'm gonna have to do some calculations to figure this out. Hopefully, I don't default on my exam too!
SU
Sue
1 year ago
C) 88.00%
DE
Devon
1 year ago
B) 88.53%
NA
Naomi
1 year ago
A) 12.00%
IZ
Izetta
1 year ago
That makes sense. I agree with you, I will go with option B as well.
TY
Tyisha
1 year ago
I think the answer is B) 88.53% because you have to calculate the complement of the probability of default at each year.
JU
Julian
1 year ago
Woah, that's a lot of numbers to keep track of! I'm gonna go with C. 88.00%, just to keep things simple.
RO
Rossana
1 year ago
I agree, let's go with C. 88.00%.
CL
Clarinda
1 year ago
I think C. 88.00% sounds like a good choice.
IZ
Izetta
2 years ago
What do you think the answer is for the probability of default question?
LE
Leslee
2 years ago
Hmm, I think the answer is B. 88.53% seems like the most accurate probability of not defaulting in 4 years.
FR
France
1 year ago
Definitely B) 88.53%, that seems to be the consensus here.
HA
Halina
1 year ago
I'm leaning towards B) 88.53% as well, it seems to make sense.
PA
Pansy
1 year ago
Yes, I also think B) 88.53% is the most accurate choice.
CA
Caprice
1 year ago
I agree, option B) 88.53% seems like the correct probability.
RO
Royal
1 year ago
Definitely B) 88.53%, that seems to be the consensus here.
GR
Gracia
1 year ago
I'm leaning towards B) 88.53% as well, it seems to make sense.
TE
Tegan
1 year ago
Yes, I also think B) 88.53% is the most accurate choice.
TW
Twanna
1 year ago
I agree, option B) 88.53% seems like the correct probability.