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Assume you make the following investments: . A $10,000 investment in a 10-year T-bond that yields 6.00%, and • A $20,000 inve

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Answer #1

Real Risk-free Rate, Inflation Premium and Maturity Risk Premium are same for Yield on T-bond and corporate bond as both have same maturities.

Liquidity Risk PremiumT-bond - Liquidity Risk PremiumCorporate-bond = 0.30%   

Yield on Corporate bond = Yield on T-bond + Default Risk Premium + (Liquidity Risk PremiumT-bond - Liquidity Risk PremiumCorporate-bond)

7.70% = 6% + DRP + 0.30%

DRP = 7.7% - 6.3% = 1.4%

So, 3rd option is correct.

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