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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
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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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
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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