Question

Use the following information to answer the question(s) below. Consider the following information regarding corporate bonds: Wyatt Oil has a bond issue outstanding with seven years to maturity, a yield to maturity of 7.0%, and a BBB rating. The corresponding risk-free rate is 3% and the market risk premium is 5%. Assuming a normal economy, the expected return on Wyatt Oil's debt is closest to:
3.0%
3.5%
4.9%
5.5%
select any one option ​

Answer 1

Answer:

Option - A

Explanation

Expected return on debt =  Risk free rate + yield to maturity * ( market risk premium - risk free rate )

                                          = 0.03 + 0.07 * ( 0.05 - 0.03)

                                          = 3.14%