Final answer:
The default premium, which compensates for the risk of a corporate issuer defaulting compared to the federal government, is 4.25%. The maturity premium, which accounts for the risk associated with a bond's length of maturity, is 3.5%.
Step-by-step explanation:
You are asking about how to estimate the default premium and maturity premium given various interest rates for different types of bonds. The default premium is the additional yield that investors require to compensate for the risk of default associated with a bond issuer when compared to a risk-free investment. The maturity premium compensates investors for the increased risk that comes with bonds that have a longer time to maturity.
To determine the default premium, compare the Treasury bond with the AAA corporate bond, since they both have a twenty-year maturity. The Treasury bond has an interest rate of 5.75%, while the AAA corporate bond offers 10%. Therefore, the default premium is the difference between these rates, which is 10% - 5.75% = 4.25%.
The maturity premium is the difference in yield between the short-term Treasury bill and the long-term Treasury bond. With a Treasury bill at 2.25% and a twenty-year Treasury bond at 5.75%, the maturity premium is calculated as 5.75% - 2.25% = 3.5%.