Problem:
Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.90%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%.
Required:
What is the default risk premium on corporate bonds?
- 3.12%
- 2.95%
- 3.35%
- 3.08%
- 4.12%
Note: Please provide reasons to support your answer.