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QUESTION
Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds...
Keys Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Keys' bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds?
