On the real test, Graph questions are presented as one or two statements with blanks in the statements; there are drop-down menus in the blanks to choose your answer.
Statement 1: Zero in on exactly what they're asking you. You're comparing Moody's and S&P, so you need to go back and forth between the left and the right graph. Next, focus on municipal bonds, which are represented by the solid line. The specific request is for the ratings category that exhibits the greatest absolute difference between the Moody's municipal line and the S&P municipal line.
This greatest difference is in the rightmost category (Caa-C/CCC-C). The Moody's municipal default rate there is about 16-17%, whereas the S&P municipal default rate there is around 45%, yielding a difference of 28-29%. Nowhere else does the difference come anywhere close to that.
The correct answer for the first blank is Caa-C/CCC-C.
Statement 2: Break this problem into parts. Focus on the BBB bonds first: 25% of 540 is 135. The S&P default rate for BBB corporate bonds is just slightly more than 10%, so you'd expect 10% of 135, or 13.5, of these bonds to default. The remaining bonds (540 - 135 = 405) are rated BB by S&P, with a 30% default rate, so 30% of 405, or 121.5, of these bonds should default. Finally, add the defaulting bonds: 13.5 + 121.5 = 135.
Alternatively, you could come up with a weighted average default rate. 25% of your bonds default at a rate of 10%, while the other 75% default at a rate of 30%. The weighted average of 10% and 30%, if weighted 25% and 75%, respectively, is 25%:
(1/4)(10) + (3/4)(30) = 25
Finally, 25% of 540 is 135.
The correct answer for the second blank is 135.
