A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are
A) 3.33% and 2.10%.
B) 2.57% and 2.86%.
C) 1.2% and 1.0%.
D) 0.76% and 0.47%.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

The default risk premium is the difference between the yield on a corporate bond and a Treasury bond of the same maturity. For Boeing, it's 7.63% - 5.06% = 2.57%. For Caterpillar, it's 7.16% - 4.3% = 2.86%.

A Treasury Bond Due in One Year Has a Yield