Consider the following information regarding corporate bonds: Rating AAA Average Default Rate 0.0% Recession Default Rate 0.0% AA A 0.196 0.2% 1.0% 3.0% Average Beta 0.05 0.05 0.05 BBB BB B 0.5% 2.2% 5.5% 3.0% 8.0% 16.0% 0.10 0.17 0.26 O 5.50%. 4.00%. O 3.50%. O 3.75%. CCC 12.2% 48.0% 0.31 Nielson Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 3.5% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%. The yield that these bonds will have to pay during average economic times is closest to:
Consider the following information regarding corporate bonds: Rating AAA Average Default Rate 0.0% Recession Default Rate 0.0% AA A 0.196 0.2% 1.0% 3.0% Average Beta 0.05 0.05 0.05 BBB BB B 0.5% 2.2% 5.5% 3.0% 8.0% 16.0% 0.10 0.17 0.26 O 5.50%. 4.00%. O 3.50%. O 3.75%. CCC 12.2% 48.0% 0.31 Nielson Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 3.5% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%. The yield that these bonds will have to pay during average economic times is closest to:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Use the following information to answer the question(s) below.
Consider the following information regarding corporate bonds:
AAA
Rating
Average Default Rate 0.0%
Recession Default Rate 0.0%
B CCC
5.5% 12.2%
AA A BBB BB
0.1% 0.2% 0.5% 2.2%
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
Nielson Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 3.5 % yield. Assume that the
market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%. The yield that these bonds will have to pay during average
economic times is closest to:
O 5.50%.
O 4.00%.
3.50%.
O 3.75%.
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