The city of Detroit filed for bankruptcy in mid-2013. After this filing, promised yields on Detroit bonds increased to approximately 16 percent. Lenders ultimately received about 25 percent of the cash flows they were promised by Detroit. Suppose that it is late-2013 and Detroit wants to issue $10M worth of one-year bonds. Also suppose that potential lenders still demand a promised yield of 16 percent, and believe that they will receive 25 percent of the cash they are promised if Detroit defaults again. Assume that the expected return on risky debt is 6 percent.  (Tip: a yield of 16%  would indicate a cash flow of 11.6 Million)

 What is the probability of default implied by this information?

Answer rating: 100% (QA)

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