In mid-2009, Rite Aid has CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%. At the same time, similar maturity Treasuries had a yield of 2%. Suppose the market risk premium is 4% and you believe Rite Aid’s bonds have a beta of 0.39. The expected loss rate of these bonds in the event of default is 52%. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
In mid-2009, Rite Aid has CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%. At the same time, similar maturity Treasuries had a yield of 2%. Suppose the market risk premium is 4% and you believe Rite Aid’s bonds have a beta of 0.39. The expected loss rate of these bonds in the event of default is 52%. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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In mid-2009, Rite Aid has CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%.
At the same time, similar maturity Treasuries had a yield of 2%. Suppose the market risk premium
is 4% and you believe Rite Aid’s bonds have a beta of 0.39. The expected loss rate of these bonds in
the event of default is 52%. What annual probability of default would be consistent with the yield to
maturity of these bonds in mid-2009?
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