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November 28, 2014

Homework Help: Finance

Posted by Magnate on Wednesday, October 21, 2009 at 12:44am.

If 10 year T bonds have a yield of 5.2%, 10 year corporate bonds yield 7.5%, the maturity risk premium on all 10 year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T bonds, what is the default risk premium on the corporate bond?
a)2.1% b)5.2% c)5.4% D)7.5%

I worked it as follows:
return= r* (risk free rate) + Inflation Premium + Default Risk Premium + Liquidity Premium + Maturity Risk Premium.

7.5% - 5.2% = r*
r= 2.3+ DRP + 0.2% + 1.1%
r= DRP + 3.6%
r/3.6% = DRP
DRP = 2.083%

Is this correct?

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