2-16 (bookistatic) During the recesi inmid-2009, homebuilder KB Home had outstan

Question

2-16 (bookistatic) During the recesi inmid-2009, homebuilder KB Home had outstanding6-year bonds with a yield to maturity of85%and a BB rating "correspond gisk bee rates wre3.0% and he mak tsk pri mnas 50% esti t EQuestion Hep the expected return of KB Home's debt using two different methods How do your results betas by rating and mataty here ) Consildering the probability of delault, the expected return of the bond isRound to twro decimal places compare?Votethe average loss rate fr unsecured debt s about 60% Seeanual default rates by debt laing here and average Data Table TABLE 12.3 Average Debt Betas by Rating and Maturity By Rating A and abo BR 0.17 Avg. Beta By Mataricy Avg, Beta Swne: S. Schaefer and l. Srebalaen."Risk in Capalknatare Arbiteage,. Stanford GSB wodng papet, 2009 0.05 0,10 0.26 0.31 (BBB and above) -5 Yar 5-10 Yar10-15 er 15 r 0.01 0.06 0.07 0.14 ter your answer in the answer box and then 2

Explanation / Answer

1) Rd = Yield to Maturity Prob(default) × Expected Loss Rate Rd = 8.5% 8% × 60% 3.70% Probability of default for BB-rated bonds in recession– it is 8%. The average loss for the unsecured debt is 60%

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