Computation of expected rate of return using capm approach

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Computation of expected rate of return using CAPM approach

The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity risk premium takes the form: MRP = 0.l%(t - l) where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?

Reference no: EM1316479

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