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A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate...

A Treasury bond that matures in 10 years has a yield of 5.75%. A 10-year corporate bond has a yield of 9.50%. Assume that the liquidity premium on the corporate bond is 0.65%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

The real risk-free rate is 3.0% and inflation is expected to be 2.25% for the next 2 years. A 2-year Treasury security yields 5.85%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

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Answer #1

Answer 1)

Given

Corporate bond yield 9.5%
Treasury bond yield 5.75%
Liquidity premium 0.65%

Default risk premium = Corporate bond yield - Treasury bond yield - Liquidity premium

Default risk premium = 9.5% - 5.75% - 0.65%

Default risk premium = 3.1%

Answer 2)

Given

Treasury security yield 5.85%
Real risk-free rate 3.0%
Inflation 2.25%

Maturity risk premium = Treasury security yield - Real risk-free rate - Inflation

Maturity risk premium = 5.85% - 3.0% - 2.25%

Maturity risk premium = 0.6%

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