Assume you make the following investments:•A $10,000 investment in a 10-year T-bond that yields 7.50%, and•A $20,000 investment in a 10-year corporate bond with an AA rating and a yield of 8.70% Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.60%, what is your estimate of the corporate bond’s default risk premium?0.84% 1.20% 1.02% 0.60%

The difference between the interest rate of the corporate bond and the risk free rate is term as the…

Answered: Assume you make the following…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5P: Default Risk Premium A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate...

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Assume you make the following investments:

•	A $10,000 investment in a 10-year T-bond that yields 7.50%, and
•	A $20,000 investment in a 10-year corporate bond with an AA rating and a yield of 8.70%

Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.60%, what is your estimate of the corporate bond’s default risk premium?

0.84%

1.20%

1.02%

0.60%

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