Consistent with yield to maturity of these bonds

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In mid-2009, Rite Aid had CCC-rated, 12-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 5%. Suppose the market risk premium is 6% and you believe Rite Aid's bonds have a beta of 0.39. The expected loss rate of these bonds in the event of default is 50%.

a. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?

b. In mid-2015, Rite-Aid's bonds had a yield of 6.6%, while similar maturity Treasuries had a yield of 1.4%. What probability of default would you estimate now?

The required return for this investment is ____ %?

Reference no: EM131906080

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