In mid-2009, Rite Aid had CCC-rated,

12

-year

bonds outstanding with a yield to maturity of

17.3 %

.

At the time, similar maturity Treasuries had a yield of

5 %

.

Suppose the market risk premium is

4 %

and you believe Rite Aid's bonds have a beta of

0.32

.

The expected loss rate of these bonds in the event of default is

60 %

.

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?