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 rate of return projected for a bond which is apprehended till its maturity period. It is also considered as the internal rate of return (IRR) that an investor earns for the bond. This approach can be used to determine the debt cost of capital when the rate of expected loss and annual default rates are provided.