n nid 2009, Rae A d had CCCrated, 16-year bonds oblak g with a yiekdto atuty ot

Question

n nid 2009, Rae A d had CCCrated, 16-year bonds oblak g with a yiekdto atuty ot 17.3% Athe time, sinla matuity Treasikad ay dof5%Sppme te matatik peniumis6% you bel e Rhe Ahbnd have a beta of 0.34. The expected loss rate ol these bonds in the event of delaul is 53S a. What annual probability of delaut would be consistent with the yield to maturily of these bonds in mid 20097 b.lnmid 2015, Rhe Aids bonds had . yield of 71%, whle sindar mdurity Treasuries hadayield of 1s% what probtay of ddat wodd you estimate now? a. What annual probability of defauit would be consistent with the yield to maturity of these bonds in mid 20097 Therequinodreher, for this inveshent is[ % Round to twe decimal places)

Explanation / Answer

Since the bond is junk rated, the YTM can not be used Rd = Rf + Beta*(Rm-Rf) Rd = 0.05 + 0.34*(0.06) 7.040% Rd = YTM - p*L p = (YTM - Rd)/L = (0.173 - 0.0704)/0.53 19.36% So 19.36% probability of default Rd,2015 = 0.015+0.34*0.06 3.54% p = (0.071-0.0354)/0.53 6.72%

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