85

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: