As a result of the credit crunch a small retail bank wants to better predict and model the likelihood that its larger commercial loans might default. It
is developing an internal ratings-based approach to assess its commercial customers. Given this one-year transition matrix what is the probability that a
loan currently rated at B will default over a two-year period?
Rating at Beginning of Period
Rating at End of Period
A
B
C
Default
A
0.90
0.10
0.00
0.00
B
0.00
0.75
0.15
0.10
C
0.0
0.05
0.55
0.40
A. 17.5%
B. 20.0%
C. 21.1%
D. 23.5%