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An analyst gathers the following 1-year transition matrix and credit spread data:

| From/To | AA | A | BBB | BB |

|---------|------|------|------|------|

| AA | 89.50| 9.00 | 1.20 | 0.30 |

| A | 2.50 | 87.00| 9.75 | 0.75 |

| BBB | 0.60 | 5.50 | 86.20| 7.70 |

| BB | 0.15 | 1.60 | 10.75| 87.50 |

Credit spread

• AA: 0.50%

• A: 1.00%

• BBB: 1.40%

• BB: 3.25%

Assuming no default, the 1-year expected return on an A rated bond with a YTM of 4.45% and modified duration of 3.50 is closest to: