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DEFAULT RISK PREMIUM A company’s 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r″) is 2.75%. The average inflation premium is 2.05%; and the maturity risk premium is estimated to be 0.1 × (t − 1)%, where t = number of years to maturity. If the liquidity premium is 0.7%, what is the default risk premium on the corporate bonds?

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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781305635937
BuyFind

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781305635937

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Chapter 6, Problem 11P
Textbook Problem

DEFAULT RISK PREMIUM A company’s 5-year bonds are yielding 7% per year. Treasury bonds with the same maturity are yielding 5.2% per year, and the real risk-free rate (r″) is 2.75%. The average inflation premium is 2.05%; and the maturity risk premium is estimated to be 0.1 × (t − 1)%, where t = number of years to maturity. If the liquidity premium is 0.7%, what is the default risk premium on the corporate bonds?

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