Default risk premium the real risk-free rate r is 2 5 an, Financial Management

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Default risk premium the real risk-free rate r is 2 5 an

DEFAULT RISK PREMIUM The real risk-free rate, r*, is 2 5%. Inflation is expected to average 2 8% a year for the next 4 years, after which time inflation is expected to average 3 75% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 8 3%, which includes a liquidity premium of 0 75%. What is its default risk premium?

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Financial Management: Default risk premium the real risk-free rate r is 2 5 an

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Financial Management: Default risk premium the real risk-free rate r is 2 5 an

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