Apart from the fact that this question is probably a Credit Migration question, I have no slightest clue of what the examiners are doing in their solution to calculate the total expected default losses. A little light will be appreciated as always.
It's not really about credit migration. Most of the marks are for showing an understanding of how the fund will grow (net of losses) over the five years. A simple model is simply to say the fund will lose 1.06% of its value every year due to BB bonds defaulting ie a loss of 5.3% (£5.3m). We don't need to worry about other transitions/states as the fund will replace any bonds which fall below BB. The examiners specifically state we have to incorporate anticipated cashflows hence the complication of estimating growth/coupons (received and paid) on the fund.
