Problem
DEFAULT RISK PREMIUM The real risk-free rate, , is 1.7%. Inflation is expected to average 1.5% a year for the next 4 years, after which time inflation is expected to average 4.8% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 8.7%, which includes a liquidity premium of 0.3%. What is its default risk premium?