In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.33%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 1.33%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 45%, what is your estimate of the expected return for these bonds?
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.33%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 1.33%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 45%, what is your estimate of the expected return for these bonds?
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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Please answer to question (c)
Transcribed Image Text:In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.33%.
a. What is the highest expected return these bonds could have?
b. At the time, similar maturity Treasuries had a yield of 1.33%. Could these bonds actually have an expected return equal to your answer in part (a)?
c. If you believe Ralston Purina's bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 45%, what is your estimate of the
expected return for these bonds?
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