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: A. 3.5% B. 4.9% C. 5.5% D. 7.0%
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: A. 3.5% B. 4.9% C. 5.5% D. 7.0%
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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Question
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:
A. 3.5%
B. 4.9%
C. 5.5%
D. 7.0%
![Rating
Average Default Rate
Recession Default Rate
Average Beta
AAA
0.0%
0.0%
0.05
AA
0.1%
1.0%
0.05
A
0.2%
3.0%
0.05
BBB
BB
B
0.5% 2.2% 5.5%
3.0%
8.0%
16.0%
0.10
0.17
0.26
CCC
12.2%
48.0%
0.31](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8ec75352-1f9f-4b87-9df1-f32a977e862c%2Fc3c627ff-e3a5-47b8-ac81-c18d59428872%2Fd84p6t_processed.png&w=3840&q=75)
Transcribed Image Text:Rating
Average Default Rate
Recession Default Rate
Average Beta
AAA
0.0%
0.0%
0.05
AA
0.1%
1.0%
0.05
A
0.2%
3.0%
0.05
BBB
BB
B
0.5% 2.2% 5.5%
3.0%
8.0%
16.0%
0.10
0.17
0.26
CCC
12.2%
48.0%
0.31
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