Question: Consider a three-year mortgage with annual payments in arrears. Suppose the probability of default is 1% in the first year and 5% each year thereafter given that default has not occurred previously.
a. What is the hazard function of this loan?
b. What is the unconditional default probability in Year 2?
c. What is the cumulative (or lifetime) default probability in this loan as of the time of its origination?