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Problem Four (10 points): Suppose the risk-free interest rate on a one-year bond is 3%. There are two corporate bonds (A and B). The
Problem Four (10 points): Suppose the risk-free interest rate on a one-year bond is 3%. There are two corporate bonds (A and B). The nominal interest rate on bond A is 8% and the interest on bond B is 9%. Bond A will mature in 10 years and bond B will mature in 5 years. The default risk premium (DRP) for bond A is 1.5% and that of bond B is 2.5%. The liquidity premium on bond A is 1.5% while the liquidity premium on bond B is 2%. Compute the risk premium (RP) of each bond. b) Compute the maturity risk premium (MRP) for each bond.
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