Question

Default risk premium

Nikki G's Corporation's 8-year bonds are currently yielding a return of 12.62 percent. The expected inflation premium is 3.2 percent annually and the real interestrate is expected to be 2.7 percent annually over the next 8 years. The liquidity risk premium on Nikki G's bonds is 0.5 percent. The maturity risk premium is 0.37percent on 3-year securities and increases by 0.85 percent for each additional year to maturity.

Required:
Calculate the default risk premium on Nikki G's 8-year bonds.

Default risk premium = ?

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