To raise funds for Gravina Island Bridge,the Government of Alaska issued bonds.The bonds have a face value of $1,000,15 years to maturity and a 7% coupon rate (annual coupons with the first coupon due in one year).The bonds are priced to yield 10%.U.S.Government T-Bonds with a 7% (annual)coupon rate and 15 years to maturity currently yield 7%.What is the default risk premium applied to the Gravina Bridge Bonds? (Assume that the Gravina bonds have the same liquidity risk premium as the T-Bonds.)

Question

Quizplus · Accepted Answer

Since they have the same maturity and coupon, the yield on the T-Bond has the same components as the yield on the Bridge bonds except for the default risk premium. Thus, the default risk premium is the difference between the Bridge yield and 7%:
10% - 7% = 3%

To Raise Funds for Gravina Island Bridge,the Government of Alaska