Question
Can someone explain how the answer was found in detail, the answer given here is correct. Default Risk Premium A Treasury bond maturing in 5
Can someone explain how the answer was found in detail, the answer given here is correct.
Default Risk Premium
A Treasury bond maturing in 5 years has a yield of 4 percent. A 5-year corporate bond has a yield of 7 percent. Consider that the liquidity premium on the corporate bond is 0.5 percent. If this is so, what is the default risk on the corporate bond?
Answer: Yield from treasury bills and inflation Premium: The risk-free rate is calculated by subtracting the current inflation rate from the yield of the treasury bond matching your investment duration.
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