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DEFAULT RISK PREMIUM A company's 5-year bonds are yielding 8.2% per year. Treasury bonds with the...

DEFAULT RISK PREMIUM

A company's 5-year bonds are yielding 8.2% per year. Treasury bonds with the same maturity are yielding 6.1% per year, and the real risk-free rate (r*) is 2.25%. The average inflation premium is 3.45%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1.2%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

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Answer #1

Default risk = company bond rate-real risk free rate-inflation premium-maturity risk premium-liquidity premium

=8.2-2.25-3.45-0.1*(5-1)-1.2=0.9%

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