Calculate corporate bonds default risk premium

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Reference no: EM131520685

A firm’s ten year bonds’ yield = 10.00%, and ten year Treasury bonds’ yield = 6%. The real risk free rate = 3.0%, the inflation premium for ten year bonds = 2.1%, the liquidity premium for the firm's bonds = 1% and zero for T-bonds. Maturity risk premium for all bonds is based on the following equation: MRP = (t – 1) × 0.1%, where t = number of years to maturity.

1. Calculate corporate bonds’ default risk premium.

2. If default risk premium for the firm's bonds = 1% and zero for T-bonds. Calculate corporate bonds’ liquidity risk premium.

3. If the liquidity premium for the firm's bonds = 2% and zero for T-bonds, the default risk premium for the firm's bonds = 2% and zero for T-bonds. Calculate the inflation premium (IP) on all ten year bonds.

4. If the liquidity premium for the firm's bonds = 2% and zero for T-bonds, the default risk premium for the firm's bonds = 2% and zero for T-bonds, and the inflation premium = 1.5%. Calculate the maturity risk premium on all ten year bonds?

Reference no: EM131520685

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