In? mid-2009, Rite Aid had? CCC-rated, 6 6?-year bonds outstanding with a yield
ID: 2616270 • Letter: I
Question
In? mid-2009, Rite Aid had? CCC-rated, 6 6?-year bonds outstanding with a yield to maturity of 17.3. At the? time, similar maturity Treasuries had a yield of3 3%. Suppose the market risk premium is 5% and you believe Rite? Aid's bonds have a beta of 0.31. The expected loss rate of these bonds in the event of default is 60%. a. What annual probability of default would be consistent with the yield to maturity of these bonds in? mid-2009? b. In? mid-2015, Rite-Aid's bonds had a yield of 7.1%?, while similar maturity Treasuries had a yield of 1.5%. What probability of default would you estimate? now? 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 4.55 . ? (Round to two decimal? places.) The annual probability of default is 21.25 ?%. ? (Round to two decimal? places.) b. In? mid-2015, Rite-Aid's bonds had a yield of 7.1%?, while similar maturity Treasuries had a yield of 1.5%. What probability of default would you estimate? now? The probability of default will be nothing ?%. ?
Explanation / Answer
a. Rd= 3% + 0.31(5%) = 4.55% = y–pL= 17.3% –p(0.60)
p= (17.3% –4.55%)/0.60 = 21.25%
b. p= (7.1% –1.5% –0.31(5%))/0.60 = 6.75%