Problem:
A Treasury bond that matures in 10 years has a yield of 3%. A 10-year corporate bond has a yield of 10%. Assume that the liquidity premium on the corporate bond is 0.7%. What is the default risk premium on the corporate bond? Please provide all computation and formulas.
The real risk-free rate is 2%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 5.4%. What is the maturity risk premium for the 2-year security?