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What is the expected annual return

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Question - A company has estimated that issuing a senior, unsecured bond in the market will require the company to pay a 7% interest rate to investors to compensate for the risk of default. The company is rated BB-. The company is also considering borrowing from a bank instead of issuing a bond.

Suppose that the probability of default on this company's debt is 3.5% a year. The recovery rate for unsecured bondholders is 40%. What is the expected annual return that bond investors will face when investing in this bond?

Reference no: EM133127580

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