Default Risk Premium

A company's 5-year bonds are yielding 9.6% per year. Treasury bonds with the same maturity are yielding 6.1% per year, and the real risk-free rate (r*) is 2.9%. The average inflation premium is 2.8%, 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 1.25%, what is the default risk premium on the corporate bonds? Round your answer to two decimal places.

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Default Risk Premium

The real risk-free rate, r*, is 3.25%. Inflation is expected to average 2.5% a year for the next 4 years, after which time inflation is expected to average 4.65% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 10.45%, which includes a liquidity premium of 0.5%. What is its default risk premium? Round your answer to two decimal places.

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