Keys Corporation's 5-year bonds yield 6.20% 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) x 0.1%; where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds? 1.17% 1.30% 1.43% 1.57% 1.73%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Keys Corporation's 5-year bonds yield 6.20% 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) x 0.1%; where t = number of years to maturity. What is the default risk
premium (DRP) on Keys' bonds?
1.17%
1.30%
1.43%
1.57%
1.73%
Transcribed Image Text:Keys Corporation's 5-year bonds yield 6.20% 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) x 0.1%; where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds? 1.17% 1.30% 1.43% 1.57% 1.73%
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