IIA1 Bond Standard IIA2 Bond Perpetuity IIB1 Stock Constant Dividend IlB2 Stock

Question

IIA1 Bond Standard IIA2 Bond Perpetuity IIB1 Stock Constant Dividend IlB2 Stock Constant Dividend Growth IIB3 Stock Supernormal Growth IIIA Current rate IIIB YTM llIC Capital Gain/Los D Dividend Yield IIIE Internal Rate of Return (IRR) IV Alternatives V Components of Interest (discount) Rates VI Real vs. Nominal Bond Type 10 Year Treasury 5 Year Treasury 5 year Corporate YTM 5.25% 4.30% 5.00% Given the information in the table, what is an estimate of the default premium? This type of question falls under the category of [al

Explanation / Answer

The default risk premium is the difference between the yield to maturity of a corporate bond and treasury bond.

=> Default Premium = 5-year Corporate - 5-year Treasury

= 5% - 4.3%

= 0.7%

This type of question will fall under V - Components of interest rates.

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