Rearden Metal has a bond issue outstanding with ten years to maturity,a yield to maturity of 8.6%,and a B rating.The corresponding risk-free rate is 3% and the market risk premium is 6%.Assuming a normal economy,the expected return on Rearden Metal's debt is closest to:

Question

Quizplus · Accepted Answer

The expected return on Rearden Metal's debt can be calculated using the following formula:

Expected return on debt = Risk-free rate + Credit risk premium

Credit risk premium = Yield to maturity - Risk-free rate

Credit risk premium = 8.6% - 3% = 5.6%

Expected return on debt = 3% + 5.6% = 8.6%

Therefore, the expected return on Rearden Metal's debt is closest to 4.6%. (Option C)

Rearden Metal Has a Bond Issue Outstanding with Ten Years