A corporate bond will mature in three years. The marginal probability of default in year one is 3%. The marginal probability of default in year two is 4%. The marginal probability of default in year three is 6%. What is the cumulative probability that default will occur during the three-year period?
A.  12.47%
B. 12.76%
C. 13%
D. 13.55%
Answer:A
This is one minus the survival rate over three years: S3(R) = (1 - d1)(1 - d2)(1 - d3) = (1 -0.03)(1 - 0.04)(1 - 0.06) = 0.8753. Hence, the cumulative default rate is 0.1247.