Default Risk Premium
A company's 5-year bonds are yielding 9.6% per year. Treasury bonds with the same maturity are yielding 5.3% per year, and the real risk-free rate (r*) is 2.25%. The average inflation premium is 2.65%, and the maturity risk premium is estimated to be 0.1(t - 1)%, where t = number of years to maturity. If the liquidity premium is 0.9%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.
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Maturity Risk Premium
An investor in Treasury securities expects inflation to be 2.3% in Year 1, 2.75% in Year 2, and 4.25% each year thereafter. Assume that the real risk-free rate is 1.5%, and that this rate will remain constant. Three-year Treasury securities yield 6.45%, while 5-year Treasury securities yield 8.10%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Round your answer to two decimal places.
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