Question

In​ mid-2009, Rite Aid had​ CCC-rated,

11

​-year

bonds outstanding with a yield to maturity of

17.3 %

.

At the​ time, similar maturity Treasuries had a yield of

4 %

.

Suppose the market risk premium is

5 %

and you believe Rite​ Aid's bonds have a beta of

0.32

.

The expected loss rate of these bonds in the event of default is

56 %

.

a. What annual probability of default would be consistent with the yield to maturity of these bonds in​ mid-2009?

b. In​ mid-2015, Rite-Aid's bonds had a yield of

7.2 %

​,

while similar maturity Treasuries had a yield of

1.6 %

.

What probability of default would you estimate​ now?

a. What annual probability of default would be consistent with the yield to maturity of these bonds in​ mid-2009?

The required return for this investment is

nothing

​%.

​ (Round to two decimal​ places.)

The annual probability of default is

nothing

​%.

​ (Round to two decimal​ places.)

b. In​ mid-2015, Rite-Aid's bonds had a yield of

7.2 %

​,

while similar maturity Treasuries had a yield of

1.6 %

.

What probability of default would you estimate​ now?

The probability of default will be

nothing

​%.

​(Round to two decimal​ places.)

Answer 1