Problem: 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%.