If 10-year T-bonds have a yield of 6 %, and the 10-year corporate bonds of Raytheonion...

If 10-year T-bonds have a yield of 6 %, and the 10-year corporate bonds of Raytheonion Inc. yield 9 %, the maturity risk premium on all 10-year bonds is 1.52%, and corporate bonds have a 0.48 % liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

Expert Solution

For a corporate security,

Based on the two formula,

Nominal yield on corporate bond = Nominal yield on Treasury bond + Liquidity Premium + Default risk premium

9% = 6% + 0.48% + Default risk premium

Default risk premium = 2.52%

jeff jeffy answered 2 years ago

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