The General Motors 3.625% July 2047 bond is priced to yield 15.990% while the Yahoo 3.625%...

The General Motors 3.625% July 2047 bond is priced to yield 15.990% while the Yahoo 3.625% July 2047 bond is priced to yield 19.600%. If the market assumes that there is a 4.315% probability that General Motors will default on the bond then the market also assumes that the probability of default on the Yahoo bond is

________%

and the expected yield in this market is _________%

Expert Solution

Answer)

Probability of default of Yahoo should be = 4.315 ( 19.6 / 15.990)

= 5.29%

Probability of default of General Motors should be = 4.315 ( 15.990 / 19.6)

= 3.52%

Since the yield of Yahoo's bond is higher, it is a riskier bond and has more risk of default than General Motors.

jeff jeffy answered 2 years ago

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