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DEF Inc. just issued a new 20-year bond at a coupon rate of 8%. If an investor bought this bond and held it to its
DEF Inc. just issued a new 20-year bond at a coupon rate of 8%. If an investor bought this bond and held it to its maturity, the investor would earn a rate of return of 6% on an annual basis. Similar maturity Government of Canada bond has a yield of 4%. If you believe DEF's bond has 1.5% chance of default per year and that expected loss rate in the event of default is 50%, what is your estimate of the expected return for this bond?
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7.25%
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3.25%
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6%
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5.25%
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