1. BBB-rated firms have default probability of 0.2% over a period of one year. Based on this information the default probability over the next quarter will be CLOSEST to:
　　A.      0.05%.
　　B.       0.45%.
　　C.       0.50%.
　　D.      1.50%.
　　ANSWER:
　　1. Correct answer: A
　　Assuming a constant marginal default probability, Default probability over a quarter = 1- (1- Default probability over a year)^(1/4) = 1 - (1 - 0.2%)^0.25 = 0.05%. However, the marginal rate of default for high credits tends to rise with the time horizon. So, the default probability for the immediate quarter is likely to be lower than the average of 0.0005.