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    Default risk premium

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    The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity risk premium takes the form: MRP = 0.l%(t - l) where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?

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    Solution Preview

    Yield on Bond = Risk Free Rate + Inflation Premium + Maturity Risk Premium + Default Risk Premium ...

    Solution Summary

    The solution explains how to calculate the default risk premium on the corporate bond.