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Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The...

Daniella is considering the purchase of a 10-year, $10,000 bond being issued by Disreputable, Inc. The bond offers an interest rate of 5.5%. The rate on a similar US Treasury bond is 2.5%. All else equal, Daniella will be getting a default premium of _____, if she purchases the Disreputable, Inc. bond.

a.

​2.5%
b.

​0%
c.

​3.0%
d.

​5.5%
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Answer #1

Default risk premium = interest rate on a bond - interest rate on a risk free bond such as treasury bond

Therefore default risk premium = 5.5% - 2.5% = 3%

Option C is correct

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