Questions:
What is the relationship between a bonds YTM and its default risk?

You are given the following information about three bonds issued by different companies. Each bond has a 2-year maturity but differs in terms of face value, coupon rate, and purchase price. Assume the companies have similar credit ratings, are subject to the same market conditions, and are otherwise identical in terms of creditworthiness and risk factors. 

Based solely on the Yield to Maturity (YTM), determine which bond likely has the highest default probability and which likely has the lowest default probability. Explain your reasoning.

Bond A
        ◦        Issued by Company A
        ◦        Face Value: $1,000
        ◦        Coupon Rate: 10% (semi-annual payments)
        ◦        Purchase Price: $1,000
        ◦        Maturity: 2 years
Bond B
        ◦        Issued by Company B
        ◦        Face Value: $10,000
        ◦        Coupon Rate: 8% (annual payments)
        ◦        Purchase Price: $9,750
        ◦        Maturity: 2 years
Bond C
        ◦        Issued by Company C
        ◦        Face Value: $500
        ◦        Coupon Rate: 12% (annual payments)
        ◦        Purchase Price: $535
        ◦        Maturity: 2 years

Reference answers:
While YTM is not a perfect measure of default probability, it is an important indicator of how investors view the risk of a bond. It is generally correlated with risk, meaning a higher YTM corresponds to a great perception of default probability.

To approximate the YTM, we can use the following formula:  YTM=[C+(FV-PV)/n]/[(FV+PV)/2])

Where:
C = coupon payment
FV = face value
PV = purchase price
n = number of periods

Doing so, results in the following: 
Bond A: 10.0%
Bond B: ~9.37%
Bond C: ~8.21%

Bond A likely has the highest default probability, as its higher YTM indicates that investors perceive greater risk. 

Bond C likely has the lowest default probability, as its lower YTM implies that investors view it as less risky, even though it has the highest coupon rate.