Question 12 6 pts A companys 5year bonds are yielding 775 pe

Question 12 6 pts A company\'s 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 52% per year, the real risk-free rate (r*) is 2.3%. The average inflation premium is 2.5%, and the maturity risk premium is estimated to be 0.1 x (t-1)%, where t-number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds? 1.00% O 255% 1.55% 6 8 9

Solution

Default risk premium:

= Return on corporate bond – Return on T bonds – Liquidity premium

= 7.75%-5.20%-1%

= 1.55%

Hence, default risk premium on the corporate bonds is 1.55%