During the recession in mid-2009, homebuilder KB Home had outstanding 7-year bonds with a yield to maturity of 8.7% and a BB rating. If corresponding risk-free rates were 2.6%, and the market risk premium was 4.8%, estimate the expected return of KB Home's debt using two different methods. How do your results compare? Note: the average loss rate for unsecured debt is about 60%. See annual default rates by debt rating here and average debt betas by rating and maturity here Considering the probability of default, the expected return of the bond is% (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Annual Default Rates by Debt Rating A 888 BB Rating: Default Rate: Average AA B CCC 5.5% 12.2% 16.0% 48.0% 0.0% 0.1% 0.2% 0.5% In Recessions 0.0% 1.0% 3.0% 3.0% Source: "Corporate Defaults and Recovery Rates, 1920-2011," Moody's Global Credit Policy, February 2012. AAA Print 2.2% 8.0% CC-C Done 14.1% 79.0% - X X W
During the recession in mid-2009, homebuilder KB Home had outstanding 7-year bonds with a yield to maturity of 8.7% and a BB rating. If corresponding risk-free rates were 2.6%, and the market risk premium was 4.8%, estimate the expected return of KB Home's debt using two different methods. How do your results compare? Note: the average loss rate for unsecured debt is about 60%. See annual default rates by debt rating here and average debt betas by rating and maturity here Considering the probability of default, the expected return of the bond is% (Round to two decimal places.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Annual Default Rates by Debt Rating A 888 BB Rating: Default Rate: Average AA B CCC 5.5% 12.2% 16.0% 48.0% 0.0% 0.1% 0.2% 0.5% In Recessions 0.0% 1.0% 3.0% 3.0% Source: "Corporate Defaults and Recovery Rates, 1920-2011," Moody's Global Credit Policy, February 2012. AAA Print 2.2% 8.0% CC-C Done 14.1% 79.0% - X X W
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:During the recession in mid-2009, homebuilder KB Home had outstanding 7-year bonds with a yield to maturity of 8.7% and a BB rating. If corresponding risk-free rates were 2.6%, and the market risk premium was 4.8%, estimate the expected return of KB Home's debt using two different methods. How do your
results compare?
Note: the average loss rate for unsecured debt is about 60%. See annual default rates by debt rating here
and average debt betas by rating and maturity here
Considering the probability of default, the expected return of the bond is %. (Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
Annual Default Rates by Debt Rating
A
BBB
BB
Rating:
Default Rate:
AAA
AA
Print
2.2%
8.0%
B
Average
0.0% 0.1% 0.2% 0.5%
In Recessions 0.0% 1.0% 3.0% 3.0%
Source: "Corporate Defaults and Recovery Rates, 1920-2011," Moody's Global Credit Policy, February
2012.
Done
CCC
5.5%
16.0%
CC-C
12.2%
48.0%
14.1%
79.0%
- X
4
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