Computation of default risk premium on the corporate bond

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Reference no: EM139911

Computation of default risk premium on the corporate bond and market's forecast for given years.

1.If 10-year T-bonds have a yield of 5.2%, 10-year corporate bonds yield 7.5%, the maturity risk premium on all 10-year bonds is 1.1%, and corporate bonds have a 0.2% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

1) 2.00%

2) 2.10%

3) 2.20%

4) 2.30%

2.Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 6.0%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?

1) 6.65%

2) 6.74%

3) 6.83%

4) 7.01%

Reference no: EM139911

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