This question is based on Exhibit 1. A bond analyst at a major fixed-income bond fund, Ashley Snowden, is considering purchasing the bond for her fund. She developed the following three scenarios for BB King bond: Scenario 1: though at a much depressed price ($20/barrel), the present supply and demand in the oil market have come into balance. And the current market condition therefore remains stable. Under Jackie Townsends (the CFO) careful stewardship of BB Kings finances over the years, BB King has a stronger balance sheet than its competitors in the fracking industry. If the bond issuance is successful, Ashley believes the company can survive 5 years and remain solvent. Unfortunately, at these oil prices, the market will eventually force BB King to shut down. At which point, the company will likely liquidate, and only pay back 60% of the principals owed on its bonds. This scenario has a 60% probability. The comparable yield to maturity for the BB King bond is 4% under this scenario. Scenario 2: the price war between Russia and OPEC, both large oil producing countries, exacerbates. That is, in a game of chicken both Russia and OPEC INCREASE oil production as market demand collapses. In this scenario, oil price will crash to single digit price per barrel (i.e., < $10/barrel) within 2 years. At that point, BB King will enter bankruptcy, and will only pay back 40% of the principals owed on its bonds. This scenario has a 10% probability, and the YTM for the BB King bond is 3% under this scenario. Scenario 3: world recovers relatively quickly from current crisis. Business activities rebound, and oil demand improves along with the global economy. Oil price recovers to above $40/barrela breakeven price for BB King. Under this scenario, BB King will survive and remain solvent for the next 10 years. This last scenario has a 30% probability, and the comparable YTM for the BB King bond is 6% under this scenario.

Q1. This question is based on Exhibit 1. After the bonds initial offer, it starts to trade in the bond market. And after a week of extremely volatile price movements, the bond price closed at $76.00 at the end of the week. What is the yield to maturity of this bond at the end of the week?

Group of answer choices

5.81%

7.50%

9.87%

11.62%