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Keys Corporations 7-year bonds yield 8%, and 7-year T-bonds yield 6.2%. The real risk-free rate is ...

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Keys Corporations 7-year bonds yield 8%, and 7-year T-bonds yield 6.2%. The real risk-free rate is ...

Keys Corporation’s 7-year bonds yield 8%, and 7-year T-bonds yield 6.2%. The real risk-free rate is r* = 3.6%, the inflation premium for 7-year bonds is IP = 2%, the liquidity premium for Keys’s bonds is LP = 0.9% 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’s bonds?

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0.5%

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0.8%

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0.9%

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1.1%

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

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