A company's 5-year bonds are yielding 9.45% per year. Treasury bonds with the same maturity are yielding 5.85% per year, and the real risk-free rate (r*) is 2.05%. The average inflation premium is 3.40%, 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 0.65%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
For corporate security,
Based on the formula above,
Nominal yield on Corporate Bond = Nominal Yield on Treasury Bond + Liquidity Premium + Default risk premium
9.45% = 5.85% + 0.65% + Default risk premium
Default risk premium = 2.95%
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