Nikki G's Corporation's 10-year bonds are currently yielding a return of 9.25%. The expected inflation premium is 2.0% annually and the real interest rate is expected to be 3.10% annually over the next 10 years. The liquidity risk premium on Nikki G's bonds is 0.1%. The maturity risk premium is 0.10% on 2-year securities and increases by 0.05% for each additional year to maturity. Calculate the default risk premium on Nikki G's 10-year bonds.

Question

Quizplus · Accepted Answer

The yield on the bond is the sum of the real interest rate, inflation premium, liquidity risk premium, maturity risk premium, and default risk premium. The maturity risk premium for a 10-year bond is 0.10% + (0.05% * 8) = 0.50%. Therefore, the default risk premium is 9.25% - (3.10% + 2.0% + 0.1% + 0.50%) = 3.55%.

Nikki G's Corporation's 10-Year Bonds Are Currently Yielding a Return