Problem:
A company's 5-year bonds are yielding 9.9% per year. Treasury bonds with the same maturity are yielding 5.15% per year, and the real risk-free rate (r*) is 2.65%. The average inflation premium is 2.1%, and the maturity risk premium is estimated to be 0.1(t - 1) %, where t = number of years to maturity.
Requirement:
Question: If the liquidity premium is 0.9%, what is the default risk premium on the corporate bonds?
Note: Please provide equation and explain comprehensively and give step by step solution.