A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity are...

A company's 5-year bonds are yielding 7.85% per year. Treasury bonds with the same maturity are yielding 5.9% per year, and the real risk-free rate (r*) is 2.45%. The average inflation premium is 3.05%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.05%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

Expert Solution

For corporate security,

Based on the formula above,

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

7.85% = 5.9% + 1.05% + Default risk premium

Default risk premium = 0.90%

jeff jeffy answered 2 years ago

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