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

14-year

bonds outstanding with a yield to maturity of

17.3%.

At the time, similar maturity Treasuries had a yield of

4%.

Suppose the market risk premium is

6%

and you believe RiteAid's bonds have a beta of

0.33.

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

52%.

What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?

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Part 1

What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?

The formula for the required return for this investment is as follows, where

E Ri

is investment's requiredreturn,

rf

is the risk-free rate,

i

is investment's beta, and

E RMktrf

is the market's risk premium.

E Ri=rf+iE RMktrf

Part 2

The required return for this investment is

enter your response here%.

(Do not round until the final answer. Then round to two decimal places.)