DEFAULT RISK PREMIUM 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 t = number of years to maturity. If the liquidity premium is 1%, what is the default risk premium on the corporate bonds?

AppendixLO1