In? mid-2012, Ralston Purina had? AA-rated, 10-year bonds outstanding with a yield to maturity of 1.51%.
a. What is the highest expected return these bonds could? have?
b. At the? time, similar maturity Treasuries had a yield of 0.51%. Could these bonds actually have an expected return equal to your answer in part ?(a?)? (select best choice below)
A. No, if the bonds are risk free, the expected returns equals the risk free rate and if they are nut risk free the expected return is less than the yield.
B. Yes, the yield to maturity is the maximum expected return you can expect.
C. Yes, if the bonds are risky enough that is if the probability of default is high enough
D. Yes because the reasons given in both A and B are true.
c. If you believe Ralston? Purina's bonds have 0.8% chance of default per? year, and that expected loss rate in the event of default is 22%?, what is your estimate of the expected return for these? bonds?
The expected return these bonds will be ??? ?%. ?(Round to two decimal? places.)