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If 10 year t bonds have a yied of 6.0%, 10 year corporate bonds yield 8.0%, the maturity risk premium on all 10 year bond is 1.0%, and corporate bonds have a 0.1% liquidity premium versus a zero liquidity premiun for t bonds what is the default risk premium on the corporate bond?

Respuesta :

Tundexi

Answer:

Default risk premium = 1.9%

Explanation:

r = r* + IP + MRP + DRP + LP

Where, IP is the Inflation premium, MRP = market risk premium, DRP=default risk premium, LP=liquidity risk premium, R* = Real risk free rate

The only factors above which will different in T bond and corporate bond is LP and DRP and others will be same

Corporate bond yield=8.0%

T bond yield=6.0%

LP=0.1%

(8.0%-6.0%)=LP+DRP

DRP = 2.0%-0.1%

DRP = 1.9%

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