A companys 5-year bonds are yielding 7.75 percent per year. Treasury bonds with the same maturity are

Question:

A company’s 5-year bonds are yielding 7.75 percent per year. Treasury bonds with the same maturity are yielding 5.2 percent per year, and the real risk-free rate (r*) is 2.3 percent. The average inflation premium is 2.5 percent, and the maturity risk premium is estimated to be 0.1 x (t - 1)%, where t = number of years to maturity. If the liquidity premium is 1 percent, what is the default risk premium on the corporate bonds?

Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...