Homework Answers
For a Corporate bond,
Nominal Yield = Real risk free rate + Inflation premium + maturity risk premium + Default risk premium + Liquidity premium
Inflation premium is average of inflation over life of bond = [(2.55% * 4) + (2.65% * 4)]/8 = 2.60%
Maturity risk premium = 0
9.5% = 2.8% + 2.60% + 0 + 0.7% + Default risk premium
Default risk premium = 3.40%
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