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Question
Following is information about three bonds:
Issuer Yield Time to Maturity
Treasury 2.0% 6 months
Company A 5.0 5 years
Company B 5.3 8 years
Although none of the bonds has a liquidity premium, any bond with a maturity equal to one year or greater has a maturity risk premium (MRP). Except for their terms to maturity, the characteristics of the Company A and Company B bonds are the same (including their default risk). The average inflation rate is expected to remain constant during the next 10 years. What is the default risk premium (DRP) associated with the bonds issued by Company A and Company B?
a. 3.0%
b. 0.3%
c. 0.6%
d. 3.2%
e. 2.5%
Answer
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