| Credit Risk |
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| § | Corporate
bonds are subject to potential default. |
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| Therefore,
the promised yield is the maximum possible |
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| yield
to maturity of the bond, not necessarily the actual |
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| yield
to maturity. |
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| § | To
compensate investors for the possibility of |
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| bankruptcy,
a corporate bond must offer a default |
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| premium,
a differential between the promised yield and |
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| the
expected yield to maturity. |
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| § | The
default premium depends on : |
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| o | the
probability of default |
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| o | the
likely loss in the event of default. |
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