Assume the rating change in a year is independent of the change in another year. Use...

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Assume the rating change in a year is independent of the change in another year. Use the one-year rating transition matrix below to compute the probability of a rating of Aa staying at Aa over a two-year period, and the probability of Aa defaulting over the same two-year period. Please show the calculations. Initial rating Aaa Aa A Baa Ba Caa Ca-C Default Rating at year end Ba Aaa Aa Baa B Caa Ca-C Default 90.94% 8.36% 0.59% 0.08% 0.02% 0.00% 0.00% 0.00% 0.00% 0.87% 89.68% 8.84% 0.45% 0.07% 0.04% 0.02% 0.00% 0.02% 0.06% 2.64% 90.90% 5.67% 0.51% 0.12% 0.04% 0.01% 0.06% 0.04% 0.16% 4.44% 90.16% 0.17% 0.02% 0.18% 4.09% 0.75% 83.03% 7.90% 0.78% 0.12% 0.01% 0.05% 0.47% 6.66% 0.01% 0.03% 0.16% 0.51% 5.32% 82.18% 7.39% 0.61% 0.00% 0.01% 0.03% 0.11% 0.46% 7.82% 78.52% 3.30% 0.00% 0.00% 0.07% 0.00% 33.249 0.80% 3.19% 11.41% 51.28% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00 0.00% 0.00% 0.00% 0.99% 3.79% 9.75% Assume the rating change in a year is independent of the change in another year. Use the one-year rating transition matrix below to compute the probability of a rating of Aa staying at Aa over a two-year period, and the probability of Aa defaulting over the same two-year period. Please show the calculations. Initial rating Aaa Aa A Baa Ba Caa Ca-C Default Rating at year end Ba Aaa Aa Baa B Caa Ca-C Default 90.94% 8.36% 0.59% 0.08% 0.02% 0.00% 0.00% 0.00% 0.00% 0.87% 89.68% 8.84% 0.45% 0.07% 0.04% 0.02% 0.00% 0.02% 0.06% 2.64% 90.90% 5.67% 0.51% 0.12% 0.04% 0.01% 0.06% 0.04% 0.16% 4.44% 90.16% 0.17% 0.02% 0.18% 4.09% 0.75% 83.03% 7.90% 0.78% 0.12% 0.01% 0.05% 0.47% 6.66% 0.01% 0.03% 0.16% 0.51% 5.32% 82.18% 7.39% 0.61% 0.00% 0.01% 0.03% 0.11% 0.46% 7.82% 78.52% 3.30% 0.00% 0.00% 0.07% 0.00% 33.249 0.80% 3.19% 11.41% 51.28% 0.00% 0.00% 0.00% 0.00% 0.00% 100.00 0.00% 0.00% 0.00% 0.99% 3.79% 9.75%

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To compute the probability of a rating of Aa staying at Aa over a twoyear period we need to use the given oneyear rating transition matrix to calculat... View the full answer