Posted: September 21st, 2016

The Debt Cost of Capital 14. In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity of 2.05%.

Question 1
The Debt Cost of Capital
14. In mid-2012, Ralston Purina had AA-rated, 10-year bonds outstanding with a yield to maturity
of 2.05%.
a. What is the highest expected return these bonds could have?
b. At the time, similar maturity Treasuries have a yield of 1.5%. Could these bonds actually
have an expected return equal to your answer in part (a)?
c. If you believe Ralston Purina’s bonds have 0.5% chance of default per year, and that expected
loss rate in the event of default is 60%, what is your estimate of the expected return for these
bonds?