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Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected

Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The bondholders' expected loss rate in the event of default is 70%. You are also given the following information for corporate bonds. Assuming the economy is in recession, then the expected return on Wyatt Oil's debt is closest to:

Rating AAA AA A BBB BB B CCC
Average Default Rate 0.0% 0.1% 0.2% 0.5% 2.2% 5.5% 12.2%
Recession Default Rate 0.0% 1.0% 3.0% 3.0% 8.0% 16.0% 48.0%
Average Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31
A.

4.9%

B.

3.5%

C.

5.5%

D.

7.0%

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