Suppose the Default Probability of a Firm, Conditional on It

question 18

Multiple Choice

Suppose the default probability of a firm, conditional on it not having defaulted so far, is 0.10 per year. What is the 5-year survival probability of the firm?

• A) 49%
• B) 51%
• C) 59%
• D) 61%

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Definitions:

Investing Activities

Transactions involving the purchase or sale of long-term assets and investments not related to the entity's primary business operations.

Financing Activities

Activities that result in changes in the size and composition of the equity capital and borrowings of an entity, typically reported in the cash flow statement.

Cash Basis

An accounting method where revenues are recognized when cash is received, and expenses are recognized when cash is paid.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including the cost of materials and labor directly tied to product creation.