Peter Faber, a portfolio manager with Loyola Partners, is considering an investment in an AA-rated corporate bond with a yield to maturity of 4.75% and is concerned about the impact of credit migration on the expected return. Faber collects the yield spread of bonds of various credit ratings and the one-year transition matrix for AA-rated bonds:

From/To	AAA	AA	A	BBB	BB	B	CCC, CC, C
AA	1.2%	84.0%	11.0%	3.5%	0.2%	0.1%	0.0%
Credit Spread:	0.85%	1.50%	1.70%	2.60%	3.40%	5.50%	11.10%

The AA-rated corporate bond is expected to have a modified duration of 5.5 at the end of the year. Faber has partially completed the expected percentage price change for various ratings change scenarios:

From AA to AAA	3.58%
From AA to A	- 1.10%
From AA to BBB
From AA to BB
From AA to B	- 22.0%
From AA to CCC, CC, C	- 52.80%

Given the above, the expected return over the next year in the absence of default is approximately:

Group of answer choices

A)4.42%

B)4.65%

C)5.09%