A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in 5 years has a yield of 5.06%.A bond issued by Boeing due in 5 years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%.The default risk premiums on the bonds issued by Boeing and Caterpillar,respectively,are

Question

Quizplus · Accepted Answer

To find the default risk premiums, we have to first find the expected default risk premium on each bond and then subtract the default risk-free rate.

For Boeing bond:
Default risk premium = yield on Boeing bond - yield on Treasury bond of same maturity
Default risk premium = 7.63% - 5.06% = 2.57%

For Caterpillar bond:
Default risk premium = yield on Caterpillar bond - yield on Treasury bond of same maturity
Default risk premium = 7.16% - 4.3% = 2.86%

Therefore, the default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are 2.57% and 2.86%. 
The best choice is B.

A Treasury Bond Due in One Year Has a Yield