Computation of default risk premium

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Reference no: EM1316362

Computation of default risk premium.

Default risk premium- The real risk-free rate r*, is 2.5 percent. Inflation is expected to average 2.8 percent a year for the next 4 years, after which time inflation is expected average 3.75 percent a year. Assume that there is no maturity risk premium. An 8-year corporate bond has a yield of 8.3 percent, which includes a liquidity premium of 0.75 percent. What is its default risk premium?

Reference no: EM1316362

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