Question

Suppose 10-year t-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.75%. Also corporate bonds have a 0.25% liquidity premium versus 0 liquidity premium for T-bonds and the maturity risk premium on both treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?

Answer 1

Answer:

1.20%

Explanation:

Calculation for What is the default risk premium on corporate bonds

Using this formula

Default risk premium=Corporate yield-T-bond yield-LP, corporate bond only

Let plug in the formula

Default risk premium=6.75%-5.30%-0.25%

Default risk premium=1.20%

Therefore the default risk premium on corporate bonds is 1.20%