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10-year Treasury-bonds yield 4.2% and 10-year corporate bonds yield 7.15%. The maturity risk premium on both...

10-year Treasury-bonds yield 4.2% and 10-year corporate bonds yield 7.15%. The maturity risk premium on both 10-year Treasury and corporate bonds is 1.3%. Corporate bonds have a 0.65% liquidity premium, while T-bonds have a zero liquidity premium.

What is the default risk premium on corporate bonds?

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Answer #1

For a corporate bond,

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

7.15% = 4.2% + Default risk premium + 0.65%

Default risk premium = 0.0230 or 2.30%

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