contestada

A company's 5-year bonds are yielding 7.75% per year. treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r*) is 2.3%. the average inflation premium is 2.5%; and the maturity risk premium is estimated to be 0.1 × (t − 1)%, where . if the liquidity premium is 1%, what is the default risk premium on the corporate bonds?

Respuesta :

Answer: The default risk premium on corporate bonds is 1.55%.

The  nominal rate of return on bonds can be expressed as a sum of the premiums on the many types risks associated with corporate bonds.

The nominal interest rate (r) formula is:

[tex]mathbf{r = r^{*}+IP+DRP+MRP+LP}[/tex]

where

r is the nominal rate of interest

r* is the real interest rate

IP is the average inflation risk premium

DRP is default risk premium

MRP is the maturity risk premium and

LP is liquidity premium

Substituting the values we get

[tex]7.75 = 2.3+2.5+DRP+0.1(5-1)+1[/tex]

[tex]7.75 = 6.2+DRP[/tex]

[tex]7.75 -6.2 = DRP[/tex]

[tex]\mathbf{DRP = 1.55}[/tex]