Current Default Risk Premium on the Corporate Bonds

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Assume that 4-year Treasury Bonds currently have a nominal yield of 6.2%, and 4-year Corporate Bonds have a nominal yield of 8.5%. Further assume that Maturity Risk Premium (MRP) on all 4-year contracts currently is 1.3%, and Corporate Bonds currently have additional 0.4% Liquidity Risk Premium (LRP) (whereas Treasury Bonds do not have Liquidity Risk Premium).

A. Write down an equation for the nominal interest rate

B. Now calculate the current Default Risk Premium (DRP) on the Corporate Bonds

Reference no: EM13836577

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