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Question: Default Risk Premium

The real risk-free rate, r*, is 1.8%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 4.5% a year. Assume that there is no maturity risk premium. An 11-year corporate bond has a yield of 8.5%, which includes a liquidity premium of 0.5%. What is its default risk premium? Do not round intermediate calculations. Round your answer to two decimal places.

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