Dakota Corporation 15-year bonds have an equilibrium rate of return is 8 percent

Question

Dakota Corporation 15-year bonds have an equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants.

Calculate the bond's default risk premium. (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

8.00% = 1.75% + 3.50% + DRP + 0.25% + 0.85% => DRP = 8.00% - (1.75% + 3.50% + 0.25% + 0.85%) = 1.65% => 165

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