Suppose economists expect that the nominal riskfree rate of return, rRF, which is also the rate on a one-year Treasury note, will be 3.2 percent long into the future. You are evaluating two corporate bonds that are identical except for their terms to maturity. The bonds have the same default risk, and neither bond has a liquidity premium. Bond T matures in five years and has a yield equal to 5.3 percent, whereas Bond Q matures in eight years and has a yield equal to 5.9 percent. Compute (a) the annual maturity risk premium (MRP) and (b) the bond’s default risk premium (DRP).
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