A corporate bond with 20 years to maturity yields 7% and has a liquidity premium of 0.9%. The real short-term risk-free rate is 1% and the average expected inflation rate over the next 20 years is 2%. The maturity risk premium is expected to be 0.001 * T, where T is the number of years to maturity. What is the default risk premium on the corporate bond?
Added by Eric S.
Step 1
Step 1: Calculate the nominal risk-free rate Nominal risk-free rate = Real risk-free rate + Expected inflation rate Nominal risk-free rate = 1% + 2% = 3% Show more…
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Akash M.
A.) The real risk-free rate is 2.25%. Inflation is expected to be 2.5% this year and 4.5% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? Do not round intermediate calculations. Round your answer to two decimal places. B.) A Treasury bond that matures in 10 years has a yield of 4.75%. A 10-year corporate bond has a yield of 9.75%. Assume that the liquidity premium on the corporate bond is 0.35%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.
Supreeta N.
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