Homework Answers
Nominal rate comprise of Risk free rate (rate on Treasury instruments of identical maturity), inflation expected, default risk premium, liquidity premium and maturity risk premium if applicable.
Given that –
Nominal rate (Yield on the 8-year corporate bond)= 9.6%
Risk free rate= 2.2%
Inflation for the years 5 through 8 expected= 3.6%
Liquidity Premium= 0.6%
Maturity risk premium is reported as Nil.
Hence Default Risk Premium= 9.6%-(2.2%+3.6%+0.6%) = 3.20%
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