Question
Inmid-2009, Rite Aid hadCCC-rated, 16 -year bonds outstanding with a yield to maturity of 17.3 % At thetime, similar maturity Treasuries had a yield of
Inmid-2009, Rite Aid hadCCC-rated, 16-year bonds outstanding with a yield to maturity of 17.3 % At thetime, similar maturity Treasuries had a yield of 3 %. Suppose the market risk premium is 4 % and you believe RiteAid's bonds have a beta of 0.37. The expected loss rate of these bonds in the event of default is 59 %
a. What annual probability of default would be consistent with the yield to maturity of these bonds inmid-2009?
b. Inmid-2015, Rite-Aid's bonds had a yield of 7.1 %, while similar maturity Treasuries had a yield of 1.6 % What probability of default would you estimatenow?
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Practical Financial Management
Authors: William R. Lasher
8th edition
1305637542, 978-1305887237, 1305887239, 978-1305637542
