Question
XYZ Corporation's 7-year bonds yield 8.50%, and 7-year T-bonds yield 5.30%. The real risk-free rate is r* = 2.50%, the inflation premium for 7-year bonds
XYZ Corporation's 7-year bonds yield 8.50%, and 7-year T-bonds yield 5.30%. The real risk-free rate is r* = 2.50%, the inflation premium for 7-year bonds is IP = 2.20%, the liquidity risk premium for XYZ's bonds is LP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t 1) x 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on XYZ's bonds?
Additional Instructions: Accepted characters: numbers, decimal point markers, sign indicators (-), spaces (e.g., as thousands separator, 5 000), "E" or "e" (used in scientific notation). NOTE: For scientific notation, a period MUST be used as the decimal point marker. Complex numbers should be in the form {a + bi} where "a" and "b" need to have explicitly stated values. For example: {1+1i} is valid whereas {1+i} is not. {0+9i} is valid whereas {9i} is not.
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