Final answer:
The liquidity premium on corporate bonds is calculated by subtracting the yield of T-bonds and default risk premium from the corporate bond's yield. Given the provided data, the liquidity premium for the corporation's 9-year bonds is found to be 4.10%.
Step-by-step explanation:
To calculate the liquidity premium on corporate bonds, we can use the information provided to back out the liquidity premium from the yield to maturity of the corporation's bonds. According to the information, the yield to maturity for corporate bonds is 11.60%, and the yield for 9-year T-bonds is 6.20%. The real risk-free rate, inflation premium, default risk premium, and maturity risk premium need to be considered to find the liquidity premium.
First, we calculate the maturity risk premium (MRP) using the formula given: MRP = (t-1) x 0.1%. For a 9-year bond, MRP = (9-1) x 0.1% = 0.8%. Now, we can break down the yield of the T-bonds: Yield_T-bond = Real risk-free rate + Inflation premium + MRP = 1.50% + 3.90% + 0.8% = 6.20%, which aligns with the given yield for T-bonds.
Next, for corporate bonds, the yield includes the default risk premium and potentially a liquidity premium (LP), in addition to the T-bond components. Yield_Corporate = Yield_T-bond + Default risk premium + LP. Substituting the known yields and premiums, we get 11.60% = 6.20% + 1.30% + LP. To find LP, rearrange the equation: LP = Yield_Corporate - Yield_T-bond - Default risk premium. LP = 11.60% - 6.20% - 1.30% = 4.10%.
The liquidity premium on corporate bonds is therefore 4.10%.