#2

In mid-2009, Rite Aid had CCC-rated, 13-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 4% and you believe Rite Aid's bonds have a beta of 0.37. The expected loss rate of these bonds in the event of default is 56%. 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 6.7%, while similar maturity Treasuries had a yield of 1.3%. 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 \%. (Round to two decimal places.) The annual probability of default is \%. (Round to two decimal places.) b. In mid-2015, Rite-Aid's bonds had a yield of 6.7%, while similar maturity Treasuries had a yield of 1.3%. What probability of default would you estimate now? The probability of default will be \%. (Round to two decimal places.)