In mid-2009, Rite Aid had CCC-rated,19-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6 % 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 55%. 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_______%.(Round to two decimal places.) The annual probability of default is _____%. (Round to two decimal places.) b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now? The probability of default will be_____%. (Round to two decimal places.)
In mid-2009, Rite Aid had CCC-rated,19-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6 % 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 55%. 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_______%.(Round to two decimal places.) The annual probability of default is _____%. (Round to two decimal places.) b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now? The probability of default 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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Question
In mid-2009, Rite Aid had CCC-rated,19-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 6 % 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 55%.
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_______%.(Round to two decimal places.)
The annual probability of default is _____%. (Round to two decimal places.)
b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.7%. What probability of default would you estimate now?
The probability of default will be_____%. (Round to two decimal places.)
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