Computation of risk premium on bonds

Reference no: EM1314860

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?

a. 1.00%

b. 1.10%

c. 1.20%

d. 1.30%

e. 1.40%

2) Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Keys' bonds is DRP = 0.50% versus zero for T-bonds, the liquidity premium on Keys' bonds is LP = 1.7%, and the maturity risk premium for all bonds is found with the formula MRP = (t? 1)*0.1%, where t = number of years to maturity. What is the inflation premium (LP) on 5-year bonds?

a. 1.50%

b. 1.60%

c. 1.70%

d. 1.80%

e. 1.90%

Reference no: EM1314860

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