If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
a. 1.00%
b. 1.10%
c. 1.20%
d. 1.30%
e. 1.40%
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Sra
If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
(Points: 4)
1.00%
1.10%
1.20%
1.30%
1.40%
1.30 r=7.5-5.2=2.3%
r=2.3+drp+0.2+1.1
r=drp+3.6
drp=r-3.6
drp=2.3-3.6=1.3
To calculate the default risk premium on the corporate bond, we need to consider the difference in yields between the corporate bond and the risk-free T-bond. Let's break down the calculation step by step:
1. Start with the yield on the corporate bond: 7.5%
2. Subtract the yield on the risk-free T-bond: 5.2%
(7.5% - 5.2% = 2.3%)
The difference between these two yields represents the overall risk premium on the corporate bond.
3. Subtract the liquidity premium for the corporate bond: 0.2%
(2.3% - 0.2% = 2.1%)
The remaining difference is the risk premium due to factors other than liquidity.
4. Subtract the maturity risk premium on all 10-year bonds: 1.1%
(2.1% - 1.1% = 1.0%)
The final result represents the default risk premium on the corporate bond.
Therefore, the default risk premium on the corporate bond is 1.0%.
The correct answer is option a. 1.00%.