In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.73%.

a. What is the highest expected return these bonds could have?

b. At the time, similar maturity Treasuries have a yield of 1.5%. Could these bonds actually have an expected return equal to your answer in part (a)?

c. If you believe Ralston Purina’s bonds have 1.2% chance of default per year, and that expected loss rate in the event of default is 26%, what is your estimate of the expected return for these bonds?