Keys Corporation's 5-year bonds yield 5.10% and 5-year T-bonds yield 4.40%. The real risk-
free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP= 1.50%, the liquidity
premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk
premium for all bonds is found with the formula MRP=(t-1) x 0.1%, where t = number of
years to maturity. What is the default risk premium (DRP) on Keys' bonds?
Answers: 2
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Keys Corporation's 5-year bonds yield 5.10% and 5-year T-bonds yield 4.40%. The real risk-
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