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?

Question

Quizplus · Accepted Answer

The default risk premium is the difference between the yield on a corporate bond and the yield on a Treasury bond with the same maturity and liquidity. In this case, the default risk premium is 8.5% - 6.2% = 2.3%.

10-Year T-Bonds Have a Yield of 6