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Dunley Corp. plans to issue 5 -year bonds. It believes the bonds will have a BBB rating. Suppose AAA bonds with the same maturity have
Dunley Corp. plans to issue 5 -year bonds. It believes the bonds will have a BBB rating. Suppose AAA bonds with the same maturity have a 3.5% yield. Assume the market risk premium is 5.0% and use the data in the below tables for your analysis. Annual Default Rates by Debt Rating (1983-2011) Average Debt Betas by Rating and Maturity a) Estimate the yield Dunley will have to pay, assuming an expected 60% loss rate in the event of default during average economic times. What spread over AAA bonds will it have to pay? b) Estimate the yield Dunley would have to pay if it were a recession, assuming the expected loss rate is 80% at that time, but the beta of debt and market risk premium are the same as in average economic times. What is Dunley's spread over AAA now
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