Question

Keys Corporation's 5-year bonds yield 5.10% and 5-year T-bonds yield 4.40%. The real risk-

free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP= 1.50%, the liquidity

premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk

premium for all bonds is found with the formula MRP=(t-1) x 0.1%, where t = number of

years to maturity. What is the default risk premium (DRP) on Keys' bonds?

Answer 1

Answer:

.20

Explanation:

=> r(corp) = rf + ip + Ip + drp + mrp , so 5.10% = 2.50% + 1.50% + 0.50% + drp + [(5-1) * 0.1]%, now solving the equation for drp, we get = 5.10 - 2.50 -1.50 -0.50 - 0.4 = 0.20%