NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.75 percent. The expected inflation premium is 1.15 percent annually and the real risk-free rate is expected to be 2.50 percent annually over the next ten years. The liquidity risk premium on NikkiG’s bonds is 0.25 percent. The maturity risk premium is 0.10 percent on 4-year securities and increases by 0.06 percent for each additional year to maturity. Calculate the default risk premium on NikkiG’s 10-year bonds. (Round your answer to 2 decimal places.)Default risk premium ____.__%

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Asked Oct 3, 2019
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NikkiG’s Corporation’s 10-year bonds are currently yielding a return of 6.75 percent. The expected inflation premium is 1.15 percent annually and the real risk-free rate is expected to be 2.50 percent annually over the next ten years. The liquidity risk premium on NikkiG’s bonds is 0.25 percent. The maturity risk premium is 0.10 percent on 4-year securities and increases by 0.06 percent for each additional year to maturity. Calculate the default risk premium on NikkiG’s 10-year bonds. (Round your answer to 2 decimal places.)

Default risk premium ____.__%
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Expert Answer

Step 1

Calculate the maturity risk premium (MRP) as follows:

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MRP 0.10% on 4-year securities +(0.06%x 6) =0.0010+0.0036 0.0046 or 0.46%|

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Step 2

Calculate the default risk pre...

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rr+IP+DRP+ LP+ MRP 6.75% 2.50%+1.15%+DRP+0.25% +0.46% = DRP+ 4.36% DRP 6.75%-4.36% 0.0239 or 2.39%

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