Dakota Corporation 15-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation premium is 1.75 percent and the real risk-free rate is 3.50 percent. The security’s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent.

The security has no special covenants. Calculate the bond’s default risk premium. (LG 2-6)