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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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