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A Treasury bond that matures in 10 years has a yield of 4.00%. A 10-year corporate...

A Treasury bond that matures in 10 years has a yield of 4.00%. A 10-year corporate bond has a yield of 9.00%. Assume that the liquidity premium on the corporate bond is 0.50%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

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Answer #1

Formula for Default risk premium is as follows:

Required rate of return-Risk free rate of return –Inflation premium- Liquidity premium- Maturity risk premium

Here

Required rate of return = 9%

Risk free rate =4%

Liquidity premium = 0.5%

Default risk premium= 9%-4%-0%-0.5%-0.0%

                                 = 4.50%

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