A ten-year U.S. Treasury bond has a 3.5 percent interest rate, while an identical maturity corporate bond has a 5.25 percent interest rate. Real interest rates and inflation rate expectations would be the same for the two bonds. If a default risk premium of 1.50 percentage points is estimated for the corporate bond, determine the liquidity premium for the corporate bond

percent. Another comparable maturity, but lower-quality, corporate bond has a yield of 14 percent, which includes a liquidity premium of 1.5 percent.

a. b.

Determine the default risk premium (DRP) on the Aaa-rated bond.

Determine the DRP on the lower-quality corporate bond.