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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%

Respuesta :

jepessoa

Answer:

c. 4.6%

Explanation:

the question is incomplete, since it is missing the average beta for B rated bonds, so I looked for similar questions: average beta for B bonds = 0.26 and since we are assuming a normal economy, we should use it:

the expected return on the bonds = risk free rate + (average beta of B rated bonds x risk premium)

expected return = 3% + (0.26 x 6%)

expected return = 3% + (0.26 x 6%) = 3% + 1.56% = 4.56% ≈ 4.6%

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