The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity ris premium takes the form: MRP = 0.1%(t - 1), where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?
The 10-year bonds of Gator Corporation are yielding 8 percent per year. Treasury bonds with the same maturity are yielding 6.4 percent per year. The real risk-free rate (k*) has not changed in recent years and is 3 percent. The average inflation premium is 2.5 percent and the maturity ris premium takes the form: MRP = 0.1%(t - 1), where t = number of years to maturity. If the liquidity premium is 0.5 percent, what is the default risk premium on the corporate bond?
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 10P
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![The 10-year bonds of Gator Corporation are yielding 8 percent per year.
Treasury bonds with the same maturity are yielding 6.4 percent per year.
The real risk-free rate (k*) has not changed in recent years and is 3
percent. The average inflation premium is 2.5 percent and the maturity risk
premium takes the form: MRP = 0.1%(t - 1), where t = number of years to
maturity. If the liquidity premium is 0.5 percent, what is the default risk
premium on the corporate bond?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe2cb17ac-f87e-423d-b89b-c1c39620d380%2Fbfead276-5468-49b4-8a47-dc377f16cc75%2Fz7z03ao_processed.png&w=3840&q=75)
Transcribed Image Text:The 10-year bonds of Gator Corporation are yielding 8 percent per year.
Treasury bonds with the same maturity are yielding 6.4 percent per year.
The real risk-free rate (k*) has not changed in recent years and is 3
percent. The average inflation premium is 2.5 percent and the maturity risk
premium takes the form: MRP = 0.1%(t - 1), where t = number of years to
maturity. If the liquidity premium is 0.5 percent, what is the default risk
premium on the corporate bond?
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