In mid-2009, Rite Aid had CCC-rated,10-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 0.31. The expected loss rate of these bonds in the event of default is 57%.

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

7.2 %7.2%,

while similar maturity Treasuries had a yield of

1.4 %1.4%.

What probability of default would you estimate now?