Questions 6 and 7 are based on the following example. A company has estimated that issuing a senior, unsecured bond in the market will require the company to pay a 7% interest rate to investors to compensate for the risk of default. The company is rated BB-. The company is also considering borrowing from a bank instead of issuing a bond.

Suppose that the recovery rate on the bank loan increases to 80% (as opposed to 40% with the unsecured bond). In addition, suppose that the bank demands the same expected return that bondholders demand. The interest rate on the bank loan will be __________.

Answer Choices:

A) 7%

B) 8%

C) 6.26%

D) 5.55%