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eBook A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity...

eBook A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity are yielding 5.9% per year, and the real risk-free rate (r*) is 2.45%. The average inflation premium is 3.05%, 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 1.05%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

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Answer #1

For corporate security,

Based on the formula above,

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

7.85% = 5.9% + 1.05% + Default risk premium

Default risk premium = 0.90%

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