GARP.FRM.PQ.P2 hazard rate (garp16-p2-33)

[frmqiu]

Hi everyone,
I have one follow up question. The question #33 is:

An analyst estimates that the hazard rate for a company is 0.16 per year. The probability of survival in the first year followed by a default in the second year is closest to:
a. 11.62%.
b. 13.63%.
c. 14.79%.
d. 27.39%.

The official answer from the updated PDF file is c = 14.79% = 1-exp(-0.16).

Do you think the answer should be exp(-0.16)*[1-exp(-0.16)]=0.1260?

 

[Deepak Chitnis]

Hi @frmqiu it is conditional default probability it should be calculated as default in 2nd year - default in 1st year/survival in 1st year = 0.27385-0.14789/0.85214=0.14782. Hope that helps.
Thank you!

 

[frmqiu]

Hi @Deepak Chitnis,
Thank you so much again for your prompt follow up! If the question is asking people to calculate that conditional probability, in my opinion, the wording of the problem statement needs to be improved. What do you think?

Hi @frmqiu it is conditional default probability it should be calculated as default in 2nd year - default in 1st year/survival in 1st year = 0.27385-0.14789/0.85214=0.14782. Hope that helps.
Thank you!

 

[David Harper CFA FRM]

Hi @frmqiu Yes, the language in question 2016.P2.Q33 was reported earlier in the year as imprecise. I recall that GARP agreed with our feedback. @Deepak Chitnis is correct that the solution implicitly is the discrete conditional PD, but the phrasing suggests it wants a joint probability.

Please see here for more detail https://forum.bionicturtle.com/thre...nswers-is-that-true-or-what-garp16-p2-33.9592