Keys Corporation's 5-year bonds yield 6.90% and 5-year T-bonds yield 4.40%. The real risk-free rate is r*
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Keys Corporation's 5-year bonds yield 6.90% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds?
a. 1.74%
b. 2.00%
c. 1.56%
d. 1.78%
e. 2.50%
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