Inmid-2012, Ralston Purina hadAA-rated, 10-year bonds outstanding with a yield to maturity of 2.24 %.

a. What is the highest expected return these bonds couldhave?

b. At thetime, similar maturity Treasuries had a yield of 1.24 %. Could these bonds actually have an expected return equal to your answer in part (a)?

c. If you believe RalstonPurina's bonds have 1.3 % chance of default peryear, and that expected loss rate in the event of default is 47 %, what is your estimate of the expected return for thesebonds?