The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.

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Quizplus · Accepted Answer

The 20-year corporate bond rate is 8.50%, which includes the default and liquidity risk premiums. The 20-year Treasury bond rate is 7.25%, so the risk premiums are 1.25% (8.50% - 7.25%). Adding these premiums to the 10-year Treasury bond rate of 6.75% gives a 10-year corporate bond rate of 8.00% (6.75% + 1.25%).

The Wall Street Journal Reports That the Current Rate on 10-Year