Question list

During the recession in mid$-2009,$ homebuilder KB Home had outstanding $7-$year bonds with a yield to maturity of $8\mathrm{.}6\%$ and a BB rating. If corresponding risk$-$free rates were $3\mathrm{.}2\%,$ and the market risk premium

was $5\mathrm{.}2\%,$ 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 $$

Question $2$

Considering the probability of default, the expected return of the bond is $\%.($Round to two decimal places.$)$

Question $3$

Considering CAPM and given the beta for a $7-$year bond, the expected return of the bond is $\%.($Round to two decimal places.$)$

How do your results compare? $($Select from the drop$-$down menu.$)$

Question $4$

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

its promised yield.

Data table

Data table

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

Average Debt Betas by Rating and Maturity