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QUESTION 3 Consider the following information regarding corporate bonds: Rating Average Default Rate Recession Default Rate A

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Answer #1

The expected return on Rearden Metal's debt is computed as shown below:

= Yield to maturity - expected loss rate in event of default x Average default rate of B rating

= 0.086 - 0.50 x 0.052

= 6%

So the correct answer will be option of 6%

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