In mid-2017, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.36%. a.
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In mid-2017, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.36%.
a. What is the highest expected return these bonds could have?
b. At the time, similar maturity Treasuries have a yield of 1.36%. Could these bonds actually have an expected return equal to your answer in part (a)?
c. If you believe Ralston Purina’s bonds have 0.5% chance of default per year, and that expected loss rate in the event of default is 48%, what is your estimate of the expected return for these bonds?
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