If 10-year T-bonds have a yield of 6

Accounting Jun 23, 2021

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? a. 1.90% b. 2.09% c. 2.30% d. 233% e. 2.78%

Expert Solution

Answer

a .

Explanation

Calculation of Default Risk Premium on the corporate bond:

Default Risk Premium = Required Rate of Return - Risk Free Rate of Return - Inflation Premium - Liquidity Premium - Maturity Risk Premium

= 8.50% - 6.20% - 0.00% - 0.40% - 0.00%

= 1.90%

Therefore, the default risk premium of the corporate bond is 1.90%

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