What is the default risk premium for abcs 5 year bonds?, Ask an Expert

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ABC company's 5 year bonds yield 7.00% and 5 year US Treasury securities yield 5.15%. The real risk-free rate (r*) is 3.0% and the inflation premium for 5 year bonds is 1.75%. There is a liquidity premium of 0.75% for ABC's bonds.

a. What is the default risk premium for ABC's 5 year bonds?

b. What circumstances in the marketplace would have to exist for ABC company to have a liquidity premium?

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