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Problem:

Default Risk Premium A company's 5-year bonds are yielding 7.75% per year. Treasury bonds with the same maturity are yielding 5.35% per year, and the real risk-free rate (r*) is 2.1%. The average inflation premium is 2.85%, 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 1%,

Required:

Question: What is the default risk premium on the corporate bonds? Round your answer to two decimal places.

Note: Please explain comprehensively and give step by step solution.

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Category:- Basic Finance
Reference No.:- M91148950

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