A Corporation's 10-Year Bonds Are Currently Yielding a Return of 7.75

question 39

Multiple Choice

A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?

• A) 0.18 percent
• B) 0.20 percent
• C) 0.22 percent
• D) 0.27 percent

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Definitions:

Premium Grade

A classification indicating that a product or material is of superior quality and usually commands a higher price.

Industrial Fiber

A material, often synthetic, designed for use in industrial applications due to its strength, durability, or specific functional properties.

Cane Juice

The liquid extract obtained from pressing sugarcane, commonly used as a sweetener or in beverages, not directly a key term in financial or accounting contexts.

Cane Fiber

Cane fiber is a natural fiber derived from the sugarcane plant, often used in the production of biodegradable items and as a sustainable material alternative.