Default Risk Premium

  • A Treasury bond maturing in 5 years has a yield of 4 percent. A 5-year corporate bond has a yield of 7 percent. Consider that the liquidity premium on the corporate bond is 0.5 percent. If this is so, what is the default risk on the corporate bond?
    Competencies Measured
    By successfully completing this assessment, you will demonstrate your proficiency in the course competencies through the following assessment scoring guide criteria:
  • Competency 1: Maximize shareholder wealth.
    • Compute real risk-free rate of return based on data presented.
    • Determine yield on 2-year and 3-year Treasury securities.
  • Competency 2: Evaluate the financial health of the firm
    • Assess the default risk of a corporate bond.

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