1. Explain why constructing a probability distribution for profits and losses (P&L) is more complicated for credit risk than for market risk. To answer this question, start by describing how you would construct such a distribution for some type of market risk, and then discuss whether the same methods are applicable for credit risk. ?
2. The Carhart Company sold a $1,000 par value, non-callable bond several years ago that now has 10 years to maturity and an 8.00% annual coupon that is paid semi-annually. The bond currently sells for $925 and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation ?