Use the following information to answer the question(s) below. Consider the following information regarding corporate bonds: Rating AAA Average Default Rate 0.0% Recession Default Rate 0.0% 0.05 Average Beta AA A BBB 0.1% 0.2% 0.5% 1.0% 3.0% 3.0% 0.05 0.05 0.10 BB B CCC 2.2% 5.5% 12.2% 8.0% 16.0% 48.0% 0.17 0.26 0.31 Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The corresponding risk - free rate is 3% and the market risk premium is 6%. Assuming a normal economy, the expected return on Rearden Metal's debt is closest to: A. 0.6% B. 1.6% C. 6.0% D. 4.6%
Use the following information to answer the question(s) below. Consider the following information regarding corporate bonds: Rating AAA Average Default Rate 0.0% Recession Default Rate 0.0% 0.05 Average Beta AA A BBB 0.1% 0.2% 0.5% 1.0% 3.0% 3.0% 0.05 0.05 0.10 BB B CCC 2.2% 5.5% 12.2% 8.0% 16.0% 48.0% 0.17 0.26 0.31 Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The corresponding risk - free rate is 3% and the market risk premium is 6%. Assuming a normal economy, the expected return on Rearden Metal's debt is closest to: A. 0.6% B. 1.6% C. 6.0% D. 4.6%
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:
Rating
AAA
Average Default Rate 0.0%
Recession Default Rate 0.0%
0.05
Average Beta
AA
A BBB
0.1% 0.2% 0.5%
1.0% 3.0% 3.0%
0.05 0.05 0.10
BB
B CCC
2.2% 5.5% 12.2%
8.0% 16.0% 48.0%
0.17 0.26 0.31
Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The
corresponding risk - free rate is 3% and the market risk premium is 6%. Assuming a normal economy, the expected
return on Rearden Metal's debt is closest to:
A. 0.6%
B. 1.6%
C. 6.0%
D. 4.6%
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