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Consider the following information regarding corporate bonds: BB Rating AAA Average Default Rate 0.0% Recession Default Rate 0.0% Average Beta 0.05 AA 0.1% 1.0% 0.05
Consider the following information regarding corporate bonds: BB Rating AAA Average Default Rate 0.0% Recession Default Rate 0.0% Average Beta 0.05 AA 0.1% 1.0% 0.05 A 0.2% 3.0% 0.05 BBB 0.5% 3.0% 0.10 B CCC 2.2% 5.5% 12.2% 8.0% 16.0% 48.0% 0.17 0.26 0.31 Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%. Assuming a normal economy the expected return on Wyatt Oil's debt is closest to: (a) 3.0% (b) 3.5% (c) 4.9% (d) 6.7%
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