Suppose that people only care about the expected values of returns of their investment. United Airlines (UA) has issued bonds. Participants of the financial market believe that there is a chance UA will totally default on its bonds. Todays market price of a one-year discount UA bond with a face value of $1,000 is $840. Todays yield on one-year zero coupon U.S. Treasury bonds is 1%.

a. Calculate the difference between yields on this UA bond and this Treasury bond. What is the difference called?

b. Calculate the investors perceived probability that UA will default.