You are considering the purchase of a bond with an annual coupon of $50, ten years to maturity, a face value of $1,100, and a current market price of $1,000.

a) What is the annual yield to maturity for this bond?

b) If you only believe that you will be able to collect 85 cents out of every dollar promised by the firm, what is your expected annual rate of return on your investment?

c) Why are the yields of high-risk bonds larger than yields on lower risk companies?