The probability of default of a security over a 1 year period is 3%. What is the probability that it would not have defaulted at theend of four years from now?
The probability that the security would not default in the next 4 years is equal to the probability of survival raised to the power four. In other words, =(1 -3%)^4 = 88.53%. Choice 'b' is the correct answer.
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