In$$ mid$-2022,$

Nestle HoldingsNestle$$Holdings

had$$ AA$-$rated, $10-$year bonds outstanding with a yield to maturity of

$3\mathrm{.}87\%3\mathrm{.}87\%.$

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

b$.$ At the$$ time, similar maturity Treasuries had a yield of

$1\mathrm{.}48\%1\mathrm{.}48\%.$

Could these bonds actually have an expected return equal to your answer in part

$($a$)?$

c$.$ If you believe

Nestle HoldingsNestle$$Holdings$\text{'}$s

bonds have

$1\mathrm{.}3\%1\mathrm{.}3\%$

chance of default per$$ year, and that expected loss rate in the event of default is

$43\%43\%,$

what is your estimate of the expected return for these$$ bonds?

Question content area bottom

Part $1$

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

The highest expected return these bonds could have is

enter your response here$\%.$

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

b$.$ At the$$ time, similar maturity Treasuries had a yield of

$1\mathrm{.}48\%1\mathrm{.}48\%.$

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

Nestle HoldingsNestle$$Holdings$\text{'}$s

bonds have

$1\mathrm{.}3\%1\mathrm{.}3\%$

chance of default per$$ year, and that expected loss rate in the event of default is

$43\%43\%,$

what is your estimate of the expected return for these$$ bonds?

The estimated expected return for these bonds is

enter your response here$\%.$

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