Question

A treasury bond due in one year has a yield of 6.2%; a treasury bond due in 5 years has a yield of 6.7%. a bond issued by xerox due in 5 years has a yield of 7.9%; a bond issued by exxon due in one year has a yield of 7.2%. the default risk premiums on the bonds issued by exxon and xerox, respectively, are

Answer 1

The default risk premiums on the exxon bond is 1%. Treasury bonds are backed by the government and have a greater security against risk. The risk premium for the xerox bond is 1.2% and has the same reasoning as the exxon bond. Government back bonds usually have less risk than corporate bonds and thus can offer lower yields.