- In mid-2009, Rite Aid had CCC-rated, 15-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 5%. Suppose the market risk premium is 6% and you believe Rite Aid’s bonds have a beta of 0.37. The expected loss rate of these bonds in the event of default is 53%.
a. What annual probability of default would be consistent with the yield to maturity of these bonds in mid-2009?
b. In mid-2012, Rite-Aid’s bonds had a yield of 8%, while similar maturity Treasuries had a yield of 1.2%. What probability of default would you estimate now?