Question
The prices of a set of zero-coupon government bonds with a face value of 100 and a time-to-maturity of 1, 2, 3, 4 and 5
The prices of a set of zero-coupon government bonds with a face value of 100 and a time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, 95.24, 91.57, 88.90, 87.14 and 86.26. These bonds can be assumed to be risk-free.
You also observe the prices of a set of zero-coupon corporate bonds, just issued by Manchester plc, each of which has a credit rating of BBB. Each bond has a face value of 100. The prices of the bonds with time-to-maturity of 1, 2, 3, 4 and 5 years are, respectively, 88.50, 78.31, 69.31, 61.33 and 54.28.
Calculate the default risk premium between the BBB yield curve and the government bond yield curve, for each maturity from 1 to 5 years.
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