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Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating.  The corresponding risk-free rate is 3% and the market risk premium is 5%.  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) 5.5%

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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%

D
Explanation:  D) rd = ytm - prob(default) × loss rate = 7% - 0.4%(70%) = 6.72%

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 the economy is in recession, then the expected return on Wyatt Oil's debt is closest to:
A) 3.5%
B) 4.9%
C) 5.5%
D) 7.0%

B
Explanation:  B) rd = ytm - prob(default) × loss rate = 7% - 3.0%(70%) = 4.9%

Thanks for helping with my corporate finance course