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Corporate Finance - Corporate Bonds

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Consider the following information regarding corporate bonds :

Rating AAA AA A BBB BB B CCC
Average default rate 0.0% 0.0% 0.2% 0.4% 2.1% 5.2% 9.9%
Recession default rate 0.0% 1.0% 3.0% 3.0% 8.0% 16.0% 43.0%
Average Beta 0.05 0.05 0.05 1.0 0.17 0.26 0.31

Rear den Mental 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, and then the expected return on Reardon Metal's debt is closest to

1. 4.6% 2. 6.0% 3.1.6% 4.0.6%.

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Probability of Default = 16% (under recession for B rated ...

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The solution discusses corporate finance and corporate bonds.

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