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

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