1. Consider the following information regarding corporate bonds:

   Rating	AAA	AA	A	BBB	BB	B	CCC
   Average Default Rate	0.0%	0.0%	0.2%	0.4%	2.1%	5.2%	9.9%
   Recession Default Rate	0.0%	1.0%	3.0%	3.0%	8.0%	16.0%	43.0%
   Average Beta	0.05	0.05	0.05	0.10	0.17	0.26	0.31

   Perpetual Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 2% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 65%. The yield that these bonds will have to pay during average economic times is closest to:

   	A.	2.50%
   	B.	4.50%
   	C.	3.50%
   	D.	4.00%