Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds:
-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%.Assuming a normal economy the expected return on Wyatt Oil's debt is closest to:
A)3.0%.
B)3.5%.
C)4.9%.
D)6.7%.

Question

Use the following information to answer the question(s)below.Consider the following information regarding corporate bonds: 
-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%.Assuming a normal economy the expected return on Wyatt Oil's debt is closest to:
A)3.0%. 
B)3.5%. 
C)4.9%. 
D)6.7%.

Quizplus · Accepted Answer

The expected return on the bond is calculated by adjusting the yield to maturity for the expected loss due to default. With a 7.0% yield and a 70% loss rate in the event of default, the expected return is closer to the yield minus the loss rate, which is approximately 6.7%.

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