Reference no: EM132371647

Following are some selected interest rates:

MATURITY OR TERM RATE TYPE OF SECURITY

1 year 4% Corporate loan ( high quality)

1 year 5% Corporate loan (low quality)

1 year 3.5% Treasury bill

5 years 5% Treasury note

5 years 6.5% Corporate bond (high quality)

5 years 8% Corporate bond (low quality)

10 years 10.5% Corporate bond (low quality)

10 years 8.5% Corporate bond (high quality)

10 years 7% Treasury bond

20 years 7.5% Treasury bond

20 years 9.5% Corporate bond (high quality)

20 years 12% Corporate bond (low quality)

a. Plot a yield curve using interest rates for government default risk-free securities.

b. Plot a yield curve using corporate debt securities with low default risk (high quality) and a separate yield curve for low- quality corporate debt securities.

c. Measure the amount of default risk premiums (DRPs), assuming constant inflation rate expectations and no maturity or liquidity risk premiums on any of the debt securities for high-quality and low-quality corporate securities based on information from (a) and (b). Describe and discuss why differences might exist between high-quality and low-quality corporate debt securities.