Consider the following information about a corporate bond: Classification AAA AA A BBB BB B...
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Finance
Consider the following information about a corporate bond:
Classification
AAA
AA
A
BBB
BB
B
CCC
Average default rate
0.0%
0.1%
0.2%
0.5%
2.2%
5.5%
12.2%
Neglect rate in recession
0.0%
1.0%
3.0%
3.0%
8.0%
16.0%
48.0%
Average beta
0.05
0.05
0.05
0.10
0.17
0.26
0.31
Wyatt Oil has issued a bond with a maturity of seven years, a yield to maturity of 7.0% and a BBB credit rating. The corresponding risk-free interest rate is 3% and the market's risk premium is 5%. Assuming that the state of the economy is normal, what is the expected yield on Wyatt Oil's debt:
Choose one:
A. 3.0%
B. 3.5%
C. 4.9%
D. 5.5%
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