Question: An analyst develops a model for forecasting bond defaults. The model is 90% accurate. In other words, of the bonds that actually default, the model

An analyst develops a model for forecasting bond defaults. The model is 90% accurate.

In other words, of the bonds that actually default, the model identifies 90% of them;

likewise, of the bonds that do not default, the model correctly predicts that 90% will not default. You have a portfolio of bonds, each with a 5% probability of defaulting.

Given that the model predicts that a bond will default, what is the probability that it actually defaults?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

The answer is 3214 By applying Bayestheorem we can calculate the ... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Introduces Quantitative Finance Questions!

Design a Java class that represents a cache with a fixed size. It should support operations like add, retrieve, and remove, and it should evict the least recently used item when it reaches capacity.

Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...

The expert consensus indicated the project was doomed to failure. Were the experts right? Team Statistics for Starting Pitchers Now that Dr. Hanke felt he had successfully developed a model for...

An analyst develops a model for forecasting bond defaults. The model is 90% accurate. In other words, of the bonds that actually default, the model identifies 90% of them; likewise, of the bonds that...

You helped me a couple of weeks ago. I was wondering if i could setup a time for tomorrow that you could be available to help me with some questions. I will pay $20 per question. They are short and I...

6.1. Carbondale Company has the following credit policy 2/10, net 30. Carbondale also charges 1% per month interest on all accounts after 30 days. The following table shows the collection schedule of...

Your end-of-semester assignment is as follows: (a) (i) read the two Economist articles entitled ?Debt is Good for You? (dated 01/25/2001) and ?Debtors? Prison? (dated 02/09/2009), which discuss the...

Jones & Bartlett Learning, LLC. NOT FOR RESALE OR DISTRIBUTION CHAPTER Hot Spot Analysis 10 LEARNING OBJECTIVES C A R R Provide a working definition of a \"hot spot.\" , Be able to explain different...

You work as an analyst for Jokull Rafnkelsson; the manager of a branch of a local bank in Reykjavik, Iceland. The bank specializes in lending to the fishing industry. Your job is to analyze the...

Your company operates in a highly regulated industry, and there have been recent changes in government policies that affect your business. How can you effectively communicate these policy changes to...

PLANT COMPANY bought a warehouse building for P660,000 on January 1, 2017. The machine's useful life is 12 years and it is estimated to have a zero residual value and is depreciated using the...

Consignment inventory is stock that is owned by the buyer but is in the physical possession of the supplier. Part 2 A . True B . False

in a workplace is another big issue that is commonly overlooked.

Using a change of time variable, reduce to the diffusion equation when c( ) > 0. Consider the BlackScholes equation, when and r can be functions of time, but k = 2r/ 2 is still a constant. Reduce...

Show that if with u(x, 0) = u0(x) > 0, then u(x, ) > 0 for all . Use this result to show that an option with positive payoff will always have a positive value. a?u on - 0 0, du at

If f(x, ) 0 in the initial value problem with u(x, 0) = 0, and u 0 as |x| , then u(x, ) 0. Hence show that if C 1 and C 2 are European calls with volatilities 1 and 2 respectively, but are...

P Corporation is a publicly held corporation which owns 10% of S Corporation's stock. S Corporation has taxable income of $100,000 and distributes a $50,000 dividend to P. P has taxable income of...

Hayden Company expects its November sales to be 20% higher than its October sales of $160,000. All sales are on credit and are collected as follows: 30% in the month of the sale and 65% in the...

On its 2021 balance sheet, Columbus Lumber showed a balance of retained earnings equal to $510 million. On its 2022 balance sheet, the balance of retained earnings was also equal to $510 million....