Using the mortality approach to estimating default probabilities can lead to overestimation if the monality data was gathered from a time period during which:
A. the economy was expanding
B. imports were expanding
C. the economy was contracting
D. imports were declining
Answer:A
Since the estimates are determined from historical default data, they are sensitive to the historical periods used. Estimates derived from a period of economic contraction will reflect higher default rates than estimates derived from periods of economic expansion.