FRM Part I · FRM Exam Part I · Measuring Credit Risk
A bank's one-year rating transition matrix shows that a BB-rated obligor has a 4% probability of moving to B, 88% of staying at BB, 6% of upgrading to BBB, and 2% of defaulting. Which of the following is the probability that the obligor is NOT in default at the end of the year?
The probability of not defaulting is 98%. Default is 2%, and the remaining probability mass covers upgrade to BBB (6%), staying at BB (88%) and downgrade to B (4%). Together these sum to 98%, so survival is one minus the default probability.
- A88%
- B94%
- C98%Correct
- D96%
Explanation
Each row of a transition matrix sums to 100%, so the survival probability is 1 minus the default probability: 1 - 2% = 98%. Check: 6 + 88 + 4 = 98. Choosing 88% counts only the probability of staying at BB and ignores migrations to other non-default ratings.
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