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A Treasury bond that matures in 10 years has a yield of 5.50%. A 10-year corporate...

A Treasury bond that matures in 10 years has a yield of 5.50%. A 10-year corporate bond has a yield of 7.25%. Assume that the liquidity premium on the corporate bond is 0.55%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

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Answer #1

For a corporate bond,

Nominal Yield on Corporate bond = Nominal yield on Treasury bond + Liquidity Premium + Default risk premium

7.25% = 5.50% + 0.55% + Default risk premium

Default risk premium = 1.20%

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