NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.05 percent. The expected inflation premium is 1.00 percent annually and the real risk-free rate is expected to be 2.10 percent annually over the next 10 years. The liquidity risk premium on NikkiG’s bonds is 0.25 percent. The maturity risk premium is 0.10 percent on 2-year securities and increases by 0.05 percent for each additional year to maturity. Calculate the default risk premium on NikkiG’s 10-year bonds
Default risk premium is the lower expected return accepted by the investor in exchange of lower risk. It is the rate of risk premium above the risk-free rate. It is the difference between risk free rate and interest rate of debt instrument.
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