Rating at beginning of period

rating at end of period

rating at end of period

rating at end of period

rating at end of period

a

b

c

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

rating at end of period

rating at end 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%