If 10-year Treasury bonds yield 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on...

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If 10-year Treasury bonds yield 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on...

If 10-year Treasury bonds yield 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, calculate the default risk premium on the corporate bonds. [10 points]

Calculate the yield on a Treasury bill?

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Answer 1

Answer #1

10 year corporate yield = 10 year Treasury yield + Liquidity Premium + Default Risk Premium

0.085 = 0.062 + 0.004 + Default Risk Premium

Default Risk Premium = 1.90%

Yield on T-bill = 0.062 - 0.013

Yield on T-bill = 4.90%

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Answer 2

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If 10-year Treasury bonds yield 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on...

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If 10-year Treasury bonds yield 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on...