A corporate bond with 20 years to maturity yields 7.2% and has a liquidity premium of 1.1%. The real short-term risk-free rate is 1% and the average expected inflation rate over the next 20 years is 2%. The maturity risk premium is expected to be 0.001 * T, where T is the number of years to maturity.

Attempt 1/3 for 10 pts.

Part 1

What is the default risk premium on the corporate bond?