Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.65%. Also, corporate...

Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.65%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
Group of answer choices
1.22%
1.34%
1.10%
0.86%
1.20%

Expert Solution

Corporate bond rate = Risk free rate + liquidity premium + default risk premium

{There is no additional maturity risk premium in corporate bond since both the bonds have same maturity risk premium)

6.65% = 5.30% + 0.25% + default risk premium

Default risk premium = 1.10%

Therefore 3rd option is correct

jeff jeffy answered 2 years ago

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