If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
A) 1.90%
B) 2.09%
C) 2.30%
D) 2.53%
E) 2.78%

Question

Quizplus · Accepted Answer

The default risk premium is the difference between the yield on corporate bonds and the yield on T-bonds, minus the maturity risk premium and the liquidity premium. In this case, the default risk premium is 8.5% - 6.2% - 1.3% - 0.4% = 1.90%.

If 10-Year T-Bonds Have a Yield of 6