Question

Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?

Answer 1

Answer:

1.10%

Explanation:

T-bond yield= 5.30%

Corporate yield= 6.65%

LP, corporate bond only= 0.25%

USE formula:

rT-bond= r + IP + MRP + DRP + LP

re-arrange because you are trying to find DRP:

DRP= rCORP- rT-bond- LP

1.10%

Answer 2

Explanation:

1.10%..............