A Corporation's 10-Year Bonds Have an Equilibrium Rate of Return

question 87

Multiple Choice

A corporation's 10-year bonds have an equilibrium rate of return of 7 percent. For all securities, the inflation risk premium is 1.50 percent and the real interest rate is 3.0 percent. The security's liquidity risk premium is 0.15 percent and maturity risk premium is 0.70 percent. The security has no special covenants. What is the bond's default risk premium?

• A) 1.40 percent
• B) 1.65 percent
• C) 5.35 percent
• D) 9.35 percent