Problem:
Default Risk Premium A company's 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5.35% per year, and the real risk-free rate (r*) is 2.1%. The average inflation premium is 2.85%, and the maturity risk premium is estimated to be 0.1(t - 1)%, where t = number of years to maturity. If the liquidity premium is 1%,
Required:
Question: What is the default risk premium on the corporate bonds? Round your answer to two decimal places.
Note: Please explain comprehensively and give step by step solution.