Question: If 10-year T-bonds have a yield of 6.2%,

Get the Best Analysis to this Case Study written by MBA/CFA writers.

**Order Now by just sending an email at assignment@writerkingdom.com . Send us case study file and questions which you want to get covered in case solution. Click Here to see how it works

Compare

Description

Question:

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond? Show work.

a. 6.3%

b. 8.5%

c. 2.20%

d. 1.90%

Answer:

Corporate bond yield includes liquidity premium and default risk premium which is not includes in T bonds. So, in 10 year T bond and 10 year corporate bond yield, liquidity risk premium and default risk premium are extra factor.

So value of default risk premium = (10 year corporate bond yield – 10 year T bond Yield) – liquidity risk premium

= (8.50% – 6.20%) – 0.40%

= 2.30% – 0.40%

= 1.90%

Default risk premium is 1.90%.

Option (D) is correct answer.

Reviews

There are no reviews yet.

Be the first to review “Question: If 10-year T-bonds have a yield of 6.2%,”

Your email address will not be published. Required fields are marked *