Koy corporations 5-year bonds yield 7 and 5-year t-bonds, Financial Management

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Koy corporations 5-year bonds yield 7 and 5-year t-bonds

Koy Corporation's 5-year bonds yield 7%, and 5-Year T-bonds yield 5.15%. The real risk-free rate is r*=3%, the inflation premium for 5=year bonds is IP=1.75%, the liquidity premium for Koy s bonds is LP=.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP=(t-1)*.1%, where t=number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?

B. 6.6 is the answer but how did we get this answer?

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Financial Management: Koy corporations 5-year bonds yield 7 and 5-year t-bonds

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Financial Management: Koy corporations 5-year bonds yield 7 and 5-year t-bonds

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