Finance Homework (real rate and default risk premimum)
How do you calculate? Is my answer correct? (a) 0.05% and 0.07% respectively. And, (b) 8% and 10% respectively.
Now, here is the problem:
You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt security with a yield of 6.5 percent. The expected inflation rate for the next year is expected to be 2.5%
(a) what would be your real rate earned on either of the two investments?
(b) what would be the default risk premium on the corporate debt security?