Question 4

ABG Corporation's 5-year bonds yield 8.50%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on ABG bonds?

a. 2.16%

b. 2.60%

c. 2.12%

d. 2.48%

e. 2.18%