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What the interest rate on the bank loan

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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 recovery rate on the bank loan increases to 80% (as opposed to 40% with the unsecured bond). In addition, suppose that the bank demands the same expected return that bondholders demand. What the interest rate on the bank loan?

Reference no: EM133109435

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