The interest rate on a ten-year Treasury bond is 9.25 percent. A comparable-maturity Aaa-rated corporate bond is yielding 10 percent. Another comparable-maturity, but lower-quality, corporate bond has a yield of 14 percent, which includes a liquidity premium of 1.5 percent.
a. Determine the default risk premium on the Aaa-rated bond.b. Determine the default risk premium on the lower-quality corporate bond.