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The real risk-free rate, r*, is 3%. Inflation is expected to average 2.75% a year for...

The real risk-free rate, r*, is 3%. Inflation is expected to average 2.75% a year for the next 4 years, after which time inflation is expected to average 4.05% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 9.15%, which includes a liquidity premium of 0.8%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.

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Answer #1

r = real risk free rate + Inflation Premium + liquidity premium + default risk premium

9.15= 3 + ((2.75*4+4.05*4)/8) + 0.8+default risk premium

            default risk premium= 1.95%

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