There Are Two Ratings in a Very Simple World: Non-Default $Q = \left[ \begin{array} { c c } 0.90 & 0.10 \\0 & 1\end{array} \right]$

question 21

Multiple Choice

There are two ratings in a very simple world: non-default (ND) and defaultd. The risk-neutral rating transition matrix per year is given by: $Q = \left[ \begin{array} { c c } 0.90 & 0.10 \\0 & 1\end{array} \right]$ i.e., the probability of defaulting when the current state is non-default is 0.10, and a defaulted bond never leaves that state and has zero recovery. The three-year zero-coupon risk-free rate is 4% (continuously-compounded) . The price of a default-risk-bearing three-year unit face value zero-coupon bond is:

• A) 0.55
• B) 0.60
• C) 0.65
• D) 0.70

---

Definitions:

Procedurally Just

Procedurally just refers to processes and decisions that are made through fair, transparent, and impartial procedures, often in legal and organizational contexts.

Dignity and Respect

The principle of treating individuals with a sense of worthiness and honor, ensuring that they feel valued and respected.

Procedural Justice

The perception of fairness in the processes and procedures that resolve disputes, allocate resources, or make decisions.

Personal Biases

Preconceived opinions or feelings toward people, objects, or ideas, often not based on reason or actual experience.