A Treasury bond due in one year has a yield of 6.3% while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9.6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively ________ and ________.

Question

Quizplus · Accepted Answer

The default risk premium for the 1-year bond is the difference between its yield (6.8%) and the risk-free rate (6.3%), which is 0.5%. 
The default risk premium for the 5-year bond is the difference between its yield (9.6%) and the risk-free rate for 5-year bonds (8.8%), which is 0.8%. Hence, the correct answer is choice (D).

A Treasury Bond Due in One Year Has a Yield