During the recession in mid$-2009,$ homebuilder KB Home had outstanding $5-$year bonds with a yield to maturity of $8\mathrm{.}3\%$ and a BB rating. If corresponding risk$-$free rates were $3\mathrm{.}3\%,$

and the market risk premium was $4\mathrm{.}7\%,$ estimate the expected return of KB Home's debt using two different methods. How do your results compare?

Note: the average loss rate for unsecured debt is about $60\%.$ See annual default rates by debt rating here, $,$ and average debt betas by rating and maturity here, $$

Considering the probability of default, the expected return of the bond is

$\%.($Round to two decimal places.$)$

Considering CAPM and given the beta for a $7-$year bond, the expected return of the bond is

$\%.($Round to two decimal places.$)$

While both estimates are rough approximations, they both confirm that the expected return of KB Home's debt is well

its promised yield. $($Select from the drop$-$down menu.$)$ Data table

$($Click on the following icon in order to copy its contents into a spreadsheet.$)$

Annual Default Rates by Debt Rating

Source: "Corporate Defaults and Recovery Rates, $1920-2011,"$ Moody's Global Credit Policy, February

Data table

$($Click on the following icon in order to copy its contents into a spreadsheet.$)$

Average Debt Betas by Rating and Maturity

Source: S$.$ Schaefer and I. Strebulaev, "Risk in Capital Structure Arbitrage," Stanford GSB

working paper, $2009.$