In mid-2009, Rite Aid had CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%. At
Question:
In mid-2009, Rite Aid had CCC-rated, 11-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 2%. Suppose the market risk premium is 4% 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 52%.
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 8.8%, while similar maturity Treasuries had a yield of 0.8%. What probability of default would you estimate now?
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Related Book For 
Corporate Finance The Core
ISBN: 9781292158334
4th Global Edition
Authors: Jonathan Berk, Peter DeMarzo
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