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:

Question

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The expected return on a bond is calculated as the yield to maturity minus the expected loss due to default. With a yield to maturity of 8.6% and an expected loss rate of 50% in the event of default, the expected return is approximately 5.9%.

Rearden Metal Has a Bond Issue Outstanding with Ten Years