Question

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:

Answer 1

Answer: 4.6%

Step-by-step explanation:

The options are:

A. 0.6%

B) 1.6%

C) 4.6%

D) 6.0%

From the question, we are told that Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating and that 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 will be:

= 3% + 0.26(6%)

= 0.03 + (0.26 × 0.06)

= 0.03 + 0.0156

= 0.0456

= 4.56%

= 4.6% approximately