Consider the following information regarding corporate bonds:[table]
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 | 0.10 | 0.17 | 0.26 | 0.31
[/table] Perpetual Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 2% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 65%. The yield that these bonds will have to pay during average economic times is closest to:

Question

BlackTom AI · Accepted Answer

CAPM supplies the market compensation for systematic risk; credit losses add an expected default cost. Start with the AAA yield as the risk‑free benchmark (2.00%) and then add the required systematic risk premium and the expected loss from default.

1) Relevant concepts
- CAPM: extra yield for systematic risk = beta × market risk premium.
- Expected default loss = default probability × loss given default (LGD).
- Total required yield ≈ risk‑free benchmark + CAPM premium + expected default loss.

2) Step-by-step calculations
- Beta for BBB (average) = 0.10.
- Market risk premium = 5.00%.
  CAPM risk premium = 0.10 × 5.00% = 0.50%.
- Average default probability for BBB = 0.4% = 0.004 (from table).
- LGD = 65% = 0.65.
  Expected default loss = 0.004 × 0.65 = 0.0026 = 0.26%.
- Base (AAA) yield = 2.00%.
  Total yield = 2.00% + 0.50% + 0.26% = 2.76%.

3) Why the correct answer is 2.50% (closest choice)
The precise theoretical yield is about 2.76%. Among the given choices (3.50%, 2.50%, 4.00%, 4.50%), 2.50% is the nearest value to 2.76% (difference 0.26 percentage points). Thus the best answer from the provided options is 2.50%.

4) Why the other choices are incorrect
- 3.50% is 0.74 percentage points above the calculated 2.76% and is not the closest.
- 4.00% and 4.50% are even farther from the computed yield and would imply much larger systematic or credit risk than the data justify.

Conclusion: The computed yield using CAPM plus expected default loss is ≈2.76%, and the closest offered choice is 2.50%, which matches the provided answer.

类似问题

Name the Supreme Court decision that removed financial constraints on PACs.

Political scientists Joshua Kalla and David Broockman find that senior policy makers made themselves available to _____ between three and four times more often than they did to constituents.

Name the political scientist who argues that parties are designed to serve the needs of ambitious politicians (namely candidates and officeholders).

Name the political scientist who said this famous quote about the problems of pluralism: “The flaw in the pluralist heaven is that the heavenly choir sings with a strong upper-class accent.”

What is the name of the third party candidate in 2000 who was not allowed to participate in the presidential debates? Hint: We watched a video clip with him in class.

E.E. Schattshneider said, "Democracy is ________ save in terms of the parties."

更多留学生实用工具

智能学习助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单