The yield on a certain 20-year corporate bond is 14%. The yield on 90-day treasury bills is 8% while 20-year treasury securities are yielding 12%. What is the default risk premium on the corporate bond?

Question

Quizplus · Accepted Answer

The default risk premium is the additional yield or return that investors demand for investing in a corporate bond compared to a risk-free rate. In this case, the 20-year treasury securities are considered risk-free as they are backed by the US government.

The yield on 20-year treasury securities is 12%, but the yield on the corporate bond is 14%. Therefore, the default risk premium is 14% - 12% = 2%.

Option C) is the correct answer as it correctly identifies the default risk premium as 2%. Options A), B), D), and E) are incorrect as they do not calculate the default risk premium correctly.

The Yield on a Certain 20-Year Corporate Bond Is 14