In mid$-2012,$ Ralston Purina had AA$-$rated, $10-$year bonds outstanding with a yield to maturity of $2\mathrm{.}36\%.$

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

b$.$ At the time, similar maturity Treasuries had a yield of $1\mathrm{.}36\%.$ Could these bonds actually have an expected return equal to your answer in part $($a$)?$

c$.$ If you believe Ralston Purina's bonds have $0\mathrm{.}5\%$ 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?

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

The highest expected return these bonds could have is $\%.($Round to two decimal places.$)$

b$.$ At the time, similar maturity Treasuries had a yield of $1\mathrm{.}36\%.$ Could these bonds actually have an expected return equal to your answer in part $($a$)?($Select the best

choice below.$)$

A$.$ No$,$ if the bonds are risk$-$free, the expected return equals the risk$-$free rate, and if they are not risk$-$free the expected return is less than the yield.

B$.$ Yes, if the bonds are risky enough, that is if the probability of default is high enough.

C$.$ Yes, the yield to maturity is the maximum expected return you can expect.

D$.$ Yes, because the reasons given in both $A.$ and $B.$ are true.

c$.$ If you believe Ralston Purina's bonds have $0\mathrm{.}5\%$ 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?

The estimated expected return for these bonds will be

$\%.($Round to two decimal places.$)$