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How to calculate the default risk premium?

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How to calculate the default risk premium?

Submitted: 10 months ago.

Category: Single Problem

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Customer:replied 10 months ago.

Assume the following risk: risk free rate is 2.5%, inflation Year 1 is 2.5%, Year 2 is 3.5% and Year 3 is 4.5%. You have invested in a three-year bond with an annual interest rate of 7.8% Required: Calculate the default risk premium for your investment – show your work.