Question

A Treasury bond that matures in 10 years has a yield of 4.75%. A 10-year corporate bond has a yield of 6.80%. Assume that the liquidity premium on the corporate bond is 0.6%. What is the default risk premium on the corporate bond? Round your answer to two decimal places. Your answer should be between 0.74 and 2.52 , rounded to 2 decimal places, with no special characters.

Answer 1

The default risk premium on the corporate bond is calculated to be 1.45%, after accounting for the given yields of both the corporate bond and the Treasury bond and the corporate bond's liquidity premium.

Step-by-step explanation:

The student is asking how to calculate the default risk premium on a corporate bond. To find this, we compare the yield of the Treasury bond and the corporate bond, and then subtract the liquidity premium from the corporate bond's yield. Given a 10-year Treasury bond yield of 4.75% and a 10-year corporate bond yield of 6.80%, with a liquidity premium of 0.6% on the corporate bond, the default risk premium is calculated as follows:

Default Risk Premium = Corporate Bond Yield - Treasury Bond Yield - Liquidity Premium

Default Risk Premium = 6.80% - 4.75% - 0.60%

Default Risk Premium = 1.45%

Therefore, the default risk premium on the corporate bond is 1.45%, rounded to two decimal places.