Default Risk Premium
A company's 5-year bonds are yielding 7.3% per year. Treasury bonds with the same maturity are yielding 5.95% per year, and the real risk-free rate (r*) is 2.15%. The average inflation premium is 3.4%, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.8%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
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Maturity Risk Premium
An investor in Treasury securities expects inflation to be 1.7% in Year 1, 3% in Year 2, and 3.85% each year thereafter. Assume that the real risk-free rate is 1.55%, and that this rate will remain constant. Three-year Treasury securities yield 6.80%, while 5-year Treasury securities yield 8.45%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.
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Default Risk Premium
The real risk-free rate, r*, is 3.2%. Inflation is expected to average 2.25% a year for the next 4 years, after which time inflation is expected to average 4.4% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 11.35%, which includes a liquidity premium of 0.65%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.
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