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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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