Nielson Motors Plans to Issue 10-Year Bonds That It Believes

Multiple Choice

Nielson Motors plans to issue 10-year bonds that it believes will have an BBB rating.Suppose AAA bonds with the same maturity have a 3.5% yield.Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 60%.The yield that these bonds will have to pay during a recession is closest to:

A) 3.50%.
B) 3.75%.
C) 4.00%.
D) 5.55%.