You are comparing a 10-year corporate bond and a 30-year corporate bond for the same firm....

You are comparing a 10-year corporate bond and a 30-year corporate bond for the same firm. Other firms of the same risk-class have a default risk premium of 1.80%, and a liquidity risk premium of 2.60%. The current return on a 10-year treasury is 3.60%. The maturity premium on the 10-year treasury is 1.80%, what is the maturity risk-premium for the 30-year bond if the yield to maturity is 10.70%?

Expert Solution

=return on 30 year bond-return on 10 year bond+maturity risk premium on 10 year bond-default risk premium-liquidity risk premium
=10.70%-3.60%+1.80%-1.80%-2.60%
=4.50%

jeff jeffy answered 2 years ago

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