A Treasury bond due in one year has a yield of 6.2%;a Treasury bond due in 5 years has a yield of 6.7%.A bond issued by General Motors due in 5 years has a yield of 7.9%;a bond issued by Exxon due in one year has a yield of 7.2%.The default risk premiums on the bonds issued by Exxon and General Motors,respectively,are
A) 1.0% and 1.2%
B) 0.5% and .7%
C) 1.2% and 1.0%
D) 0.7% and 0.5%
E) none of these

Question

Quizplus · Accepted Answer

The default risk premium is the difference between the yield of a corporate bond and a Treasury bond of the same maturity. For Exxon, the default risk premium is 7.2% - 6.2% = 1.0%. For General Motors, it is 7.9% - 6.7% = 1.2%.

A Treasury Bond Due in One Year Has a Yield