Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds:
-Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The bondholders expected loss rate in the event of default is 50%.Assuming a normal economy the expected return on Rearden Metal's debt is closest to:
A)0.6%
B)1.6%
C)4.6%
D)6.0%

Question

Use the following information to answer the question(s)below.
Consider the following information regarding corporate bonds: 
-Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The bondholders expected loss rate in the event of default is 50%.Assuming a normal economy the expected return on Rearden Metal's debt is closest to:
A)0.6% 
B)1.6% 
C)4.6% 
D)6.0%

Quizplus · Accepted Answer

D)r_d = ytm - prob(default)× loss rate = 8.6% - 5.2%(50%)= 6.00%

Use the Following Information to Answer the Question(s)below