Question1: If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1 percent, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, determine the default risk premium on the corporate bond?
[A] 1.20%
[B] 1.30%
[C] 1.40%
[D] 1.00%
[E] 1.10%
Question2: Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40 percent. The real risk-free rate is r* = 2.5%, the default risk premium for Keys' bonds is DRP = 0.50% versus zero for T-bonds, the liquidity premium on Keys' bonds is LP = 1.7%, & the maturity risk premium for all bonds is found with the formula MRP = (t? 1)*0.1%, where t = number of years to maturity. Determine the inflation premium (LP) on five year bonds?
[A] 1.70%
[B] 1.80%
[C] 1.90%
[D] 1.50%
[E] 1.60%