In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.34%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 1.34%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.6% chance of default per year, and that expected loss rate in the event of default is 54%, what is your estimate of the expected return for these bonds? a. What is the highest expected return these bonds could have? The highest expected return these bonds could have is ☐ %. (Round to two decimal places.) b. At the time, similar maturity Treasuries had a yield of 1.34%. Could these bonds actually have an expected return equal to your answer in part (a)? (Select the best choice below.) OA. No, if the bonds are risk-free, the expected return equals the risk-free rate, and if they are not risk-free the expected return is less than the yield. B. Yes, the yield to maturity is the maximum expected return you can expect. C. Yes, if the bonds are risky enough, that is if the probability of default is high enough. D. Yes, because the reasons given in both A. and B. are true. c. If you believe Ralston Purina's bonds have 0.6% chance of default per year, and that expected loss rate in the event of default is 54%, what is your estimate of the expected return for these bonds? The estimated expected return for these bonds will be %. (Round to two decimal places.)
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.34%. a. What is the highest expected return these bonds could have? b. At the time, similar maturity Treasuries had a yield of 1.34%. Could these bonds actually have an expected return equal to your answer in part (a)? c. If you believe Ralston Purina's bonds have 0.6% chance of default per year, and that expected loss rate in the event of default is 54%, what is your estimate of the expected return for these bonds? a. What is the highest expected return these bonds could have? The highest expected return these bonds could have is ☐ %. (Round to two decimal places.) b. At the time, similar maturity Treasuries had a yield of 1.34%. Could these bonds actually have an expected return equal to your answer in part (a)? (Select the best choice below.) OA. No, if the bonds are risk-free, the expected return equals the risk-free rate, and if they are not risk-free the expected return is less than the yield. B. Yes, the yield to maturity is the maximum expected return you can expect. C. Yes, if the bonds are risky enough, that is if the probability of default is high enough. D. Yes, because the reasons given in both A. and B. are true. c. If you believe Ralston Purina's bonds have 0.6% chance of default per year, and that expected loss rate in the event of default is 54%, what is your estimate of the expected return for these bonds? The estimated expected return for these bonds will be %. (Round to two decimal places.)
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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Transcribed Image Text:In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.34%.
a. What is the highest expected return these bonds could have?
b. At the time, similar maturity Treasuries had a yield of 1.34%. Could these bonds actually have an expected return
equal to your answer in part (a)?
c. If you believe Ralston Purina's bonds have 0.6% chance of default per year, and that expected loss rate in the event
of default is 54%, what is your estimate of the expected return for these bonds?
a. What is the highest expected return these bonds could have?
The highest expected return these bonds could have is ☐ %. (Round to two decimal places.)
b. At the time, similar maturity Treasuries had a yield of 1.34%. Could these bonds actually have an expected return
equal to your answer in part (a)? (Select the best choice below.)
OA. No, if the bonds are risk-free, the expected return equals the risk-free rate, and if they are not risk-free the
expected return is less than the yield.
B. Yes, the yield to maturity is the maximum expected return you can expect.
C. Yes, if the bonds are risky enough, that is if the probability of default is high enough.
D. Yes, because the reasons given in both A. and B. are true.
c. If you believe Ralston Purina's bonds have 0.6% chance of default per year, and that expected loss rate in the event
of default is 54%, what is your estimate of the expected return for these bonds?
The estimated expected return for these bonds will be %. (Round to two decimal places.)
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