Question

Dakota corporation 15-year bonds have an equilibrium rate of return of 9 percent. for all securities, the inflation risk premium is 1.60 percent and the real risk-free rate is 3.30 percent. the security's liquidity risk premium is 1.05 percent and maturity risk premium is 1.65 percent. the security has no special covenants. calculate the bond's default risk premium.

Answer 1

1.40%

Step-by-step explanation:

The computation of the default risk premium is shown below:

As we know that

Default risk premium = Required rate of return - risk free rate of return - Inflation premium - liquidity premium - maturity risk premium

= 9% - 3.30% - 1.60% - 1.05% - 1.65%

= 1.40%

By applying the above formula we can get the default risk premium