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Secure https/newconnect.mheducation.com/flow/connect.htm Priceline.com D TripAdvisor imported From IE 2 Chapters 4-7 6 Help Save & Exit Sub Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. For all securities, the inflation risk premium is 1.60 percent and the real risk-free rate is 3.30 percent. The security's liquidity risk premium is 1.05 percent and maturity risk premium is 165 percent. The security has no special covenants. Calculate the bond's default risk premium. (Round your answer to 2 decimal places) Prey 10 or 15 ill Nen>

Explanation / Answer

Answer is 1.40%

Rate of Return = Real Risk-free Rate + Inflation Risk Premium + Liquidity Risk Premium + Maturity Risk Premium + Default Risk Premium
9.00% = 3.30% + 1.60% + 1.05% + 1.65% + Default Risk Premium
Default Risk Premium = 1.40%

So, bond’s default risk premium is 1.40%

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