In mid-2009, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to maturity of 17.3%. At

Question:

In mid-2009, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to of 17.3%. At the time, similar Treasuries had a yield of 3%. Suppose the market risk premium is 5% and you believe Rite Aid’s bonds have a beta of 0.31. The expected loss rate of these bonds in the event of default is 60%.
a. What annual probability of default would be consistent with the yield to of these bonds in mid-2009?
b. In mid-2012, Rite-Aid’s bonds had a yield of 8.3%, while similar Treasuries had a yield of 1%. What probability of default would you estimate now?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...