The yield on a certain 20-year corporate bond is 14%. The yield on 90-day treasury bills is 8% while 20-year treasury securities are yielding 12%. What is the default risk premium on the corporate bond?

A) 0%
B) 1%
C) 2%
D) 3%
E) 4%

Question

Kimberly Mercado · Accepted Answer

Final Answer : C, Explanation :  The default risk premium is the additional yield or return that investors demand for investing in a corporate bond compared to a risk-free rate. In this case, the 20-year treasury securities are considered risk-free as they are backed by the US government.The yield on 20-year treasury securities is 12%, but the yield on the corporate bond is 14%. Therefore, the default risk premium is 14% - 12% = 2%.Option C) is the correct answer as it correctly identifies the default risk premium as 2%. Options A), B), D), and E) are incorrect as they do not calculate the default risk premium correctly.

The yield on a certain 20-year corporate bond is 14%. The yield on 90-day treasury bills is 8% while 20-year treasury securities are yielding 12%. What is the default risk premium on the corporate bond?

A) 0%
B) 1%
C) 2%
D) 3%
E) 4%

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Learning Objectives

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The yield on a certain 20-year corporate bond is 14%. The yield on 90-day treasury bills is 8% while 20-year treasury securities are yielding 12%. What is the default risk premium on the corporate bond?A) 0%B) 1%C) 2%D) 3%E) 4%

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Learning Objectives

Learning Objectives

Related questions

The yield on a certain 20-year corporate bond is 14%. The yield on 90-day treasury bills is 8% while 20-year treasury securities are yielding 12%. What is the default risk premium on the corporate bond?

A) 0%
B) 1%
C) 2%
D) 3%
E) 4%