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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QUESTION 3 Consider the following information regarding corporate bonds: Rating Average Default Rate Recession Default Rate...
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During the recession in mid-2009, homebuilder KB Home had outstanding 5 -year bonds with a yield to maturity of 8.4 % and a BB rating. If corresponding risk-free rates were 3.1 % and the market risk premium was 4.7 % estimate the expected return of KB Home's debt using two different methods. During the recession in mid-2009, homebuilder KB Home had outstanding 5-year bonds with a yield to maturity of 8.4% and a BB rating. If corresponding risk-free rates were...