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Problem 4 FIN300 Corporations 10-year bonds yield 8.00%, and 10-year T-bonds yield 6%. The real risk-free rate is r* 3.0%, the inflation premium for 5-year bonds is IP = 1.95%, the liquidity premium for FIN300s bonds is LP = 1% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP (-1) x 0.07%, where t-number of years to maturity. What is the default risk premium (DRP) on FIN300s bonds?

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Default risk premium=yield on FIN300-yield on T bonds-liquidity premium on FIN300=8%-6%-1%=1%

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