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A Treasury bond that matures in 10 years has a yield of 6%. A 10 year...

A Treasury bond that matures in 10 years has a yield of 6%. A 10 year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%.What is the default risk premium on the corporate bond

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Answer #1

Default Risk- Default risk is a risk that a company is unable to make the required payments on their debt obligation. Higher the risk higher the return.
Default Risk Premium = Corporate bond yield - Treasury bond yield - Liquidity premium
Default risk premium = 9% - 6%- 0.5%
DRP = 2.5%
Treasury bond is less riskier as compared to Corporate bonds because they are issued by government.

I hope this clear your doubt.

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