In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.46%.
a. What is the highest expected return these bonds could have?
The highest expected return these bonds could have is ______ %. (Round to two decimal places.)
b. At the time, similar maturity Treasuries had a yield of 1.46 %. Could these bonds actually have an expected return equal to your answer in part (a)? (Select the best choice below.)
A. No, if the bonds are risk-free, the expected return equals the risk-free rate, and if they are not risk-free the expected return is less than the yield.
B. Yes, if the bonds are risky enough, that is if the probability of default is high enough.
C. Yes, the yield to maturity is the maximum expected return you can expect.
D. Yes, because the reasons given in both A. and B. are true.
c. If you believe Ralston Purina's bonds have 0.9 %chance of default per year, and that expected loss rate in the event of default is 52 %, what is your estimate of the expected return for these bonds?
The estimated expected return for these bonds will be ________%. (Round to two decimal places.).