Question (4 Marks) CLO4 The real risk-free rate is 3.75%. Inflation is expected to average 4.2% a year for the next 4 years, after which time inflation is expected to average 5.625% a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 12.45%, which includes a liquidity premium of 1.125%. A] Calculate the default risk premium. [2] BJ Without further calculations, explain how do you expect the default risk premium for the following securities to differ from the default risk premium calculated in (A) [e.g. higher, lower, etc). Justify clearly your answer: A two-year corporate bond. [1] An 8-year treasury bond. Heading 4 111