The real risk-free rate r is 15 inflation is expected to, Financial Management

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The real risk-free rate r is 15 inflation is expected to

Default Risk Premium

The real risk-free rate, r*, is 1.5%. Inflation is expected to average 3.25% a year for the next 4 years, after which time inflation is expected to average 4.9% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 10.3%, which includes a liquidity premium of 0.45%. What is its default risk premium? Round your answer to two decimal places.

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