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EpiscoWhat EpiscoWhat
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6 years ago
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:
A) 0.6%   
B) 1.6%
C) 4.6%
D) 6.0%
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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wrote...
#1
6 years ago
C
Explanation:  C) rd = rrf + β(rm - rrf) = 3% + 0.26(6%) = 4.56%
EpiscoWhat Author
wrote...
#2
6 years ago
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:
A) 0.6%   
B) 1.6%
C) 4.6%
D) 6.0%
wrote...
#3
6 years ago
D
Explanation:  D) rd = ytm - prob(default) × loss rate = 8.6% - 5.2%(50%) = 6.00%
wrote...
#4
6 years ago
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 the economy is in recession, then the expected return on Rearden Metal's debt is closest to:
A) 0.6%   
B) 1.6%
C) 4.6%
D) 6.0%
wrote...
#5
6 years ago
A
Explanation:  A) rd = ytm - prob(default) × loss rate = 8.6% - 16.0%(50%) = 0.6%
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