question about marginal prob of default

[itsyourz]

Hi,

practice exam 08 part I number 38.

I dont understand the solution intuitively

Conditional Probability (24 months / not defaulted during first 12 months) =

(45.6% - 21.5% ) / (1-21.5%)

is it bayes theorem?

denominator is probability of nondefault in first year

and what is numerator?

 

[David Harper CFA FRM]

Hi suk,

The answer is unnecessarily complicated. And, no I don't consider that Bayes. The question says monthly marginal PD in year 2 = 3%.

Therefore, marginal (annual) PD in year 2 = 1 - (1-3%)^12 = 30.6%

David