EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
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Chapter 12, Problem 15P
a)
Summary Introduction
To determine: The probability of default that is consistent with the yield to maturity of the bonds.
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital.
b)
Summary Introduction
To determine: The probability of default that is consistent with the yield to maturity of the bonds.
Introduction:
Yield to maturity (YTM) is the
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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 premiumis 4% and you believe Rite Aid’s bonds have a beta of 0.39. The expected loss rate of these bonds inthe event of default is 52%. What annual probability of default would be consistent with the yield tomaturity of these bonds in mid-2009?
In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.53%.
a. What is the highest expected return these bonds could have?
b. At the time, similar maturity Treasuries had a yield of 0.53%. Could these bonds actually have an expected return
equal to your answer in part (a)?
c. If you believe Ralston Purina's bonds have 0.8% 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.)
During the recession in mid-2009, homebuilder KB Home had outstanding 7-year bonds with a yield to maturity of 8.7% and a BB rating. If corresponding risk-free rates were 2.6%, and the market risk premium was 4.8%, estimate the expected return of KB Home's debt using two different methods. How do your
results compare?
Note: the average loss rate for unsecured debt is about 60%. See annual default rates by debt rating here
and average debt betas by rating and maturity here
Considering the probability of default, the expected return of the bond is %. (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Annual Default Rates by Debt Rating
A
BBB
BB
Rating:
Default Rate:
AAA
AA
Print
2.2%
8.0%
B
Average
0.0% 0.1% 0.2% 0.5%
In Recessions 0.0% 1.0% 3.0% 3.0%
Source: "Corporate Defaults and Recovery Rates, 1920-2011," Moody's Global Credit Policy, February
2012.
Done
CCC
5.5%
16.0%
CC-C
12.2%
48.0%
14.1%
79.0%
- X
4
Chapter 12 Solutions
EBK CORPORATE FINANCE
Ch. 12.1 - According to the CAPM, we can determine the cost...Ch. 12.1 - What inputs do we need to estimate a firms equity...Ch. 12.2 - How do you determine the weight of a stock in the...Ch. 12.2 - Prob. 2CCCh. 12.2 - Prob. 3CCCh. 12.3 - How can you estimate a stocks beta from historical...Ch. 12.3 - How do we define a stocks alpha, and what is its...Ch. 12.4 - Why does the yield to maturity of a firms debt...Ch. 12.4 - Prob. 2CCCh. 12.5 - What data can we use to estimate the beta of a...
Ch. 12.5 - Prob. 2CCCh. 12.6 - Why might projects within the same firm have...Ch. 12.6 - Under what conditions can we evaluate a project...Ch. 12.7 - Prob. 1CCCh. 12.7 - Prob. 2CCCh. 12 - Prob. 1PCh. 12 - Suppose the market portfolio has an expected...Ch. 12 - Prob. 3PCh. 12 - Suppose all possible investment opportunities in...Ch. 12 - Using the data in Problem 4, suppose you are...Ch. 12 - Prob. 6PCh. 12 - Prob. 7PCh. 12 - Suppose that in place of the SP 500, you wanted to...Ch. 12 - Prob. 9PCh. 12 - You need to estimate the equity cost or capital...Ch. 12 - In mid-2012, Ralston Purina had AA-rated, 10-year...Ch. 12 - Prob. 15PCh. 12 - Prob. 16PCh. 12 - Prob. 17PCh. 12 - Your firm is planning to invest in an automated...Ch. 12 - Consider the setting of Problem 18. You decided to...Ch. 12 - Prob. 20PCh. 12 - In mid-2015, Cisco Systems had a market...Ch. 12 - Weston Enterprises is an all-equity firm with two...Ch. 12 - Prob. 24PCh. 12 - Your company operates a steel plant. On average,...Ch. 12 - Prob. 26PCh. 12 - You would like to estimate the weighted average...
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