Solution-Estimate of the expected return

Estimate of the expected return

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In 2021, Capstone Inc. had BBB-rated, ten-year bonds outstanding with a yield to maturity of 5.50%. At the time, similar maturity Treasuries had a yield of 1.25%.

a. If Capstone's bonds were risk-free, what is your estimate of the expected return for these a. bonds?

b. If you believe Capstone's bonds have a 3.5% chance of default per year and that the expected loss rate in the event of default is 25%, what is your estimate of the expected return of these bonds?

Reference no: EM132953597

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Estimate of the expected return

Reference no: EM132953597

Reference no: EM132953597

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