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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%

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 1.0 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 the economy is in recession, then the expected return on Wyatt Oil's debt is closest to:

7.0%

5.5%

3.5%

4.9%

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