In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 1.63%.

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

b. At the time, similar maturity Treasuries had a yield of 0.63%. Could these bonds actually have an expected return equal to your answer in part(a)?

c. If you believe Ralston Purina's bonds have 0.9% chance of default per year, and that expected loss rate in the event of default is 44%, what is your estimate of the expected return for these bonds?