The default risk premium at a certain point in time may be expressed by comparing the interest rates on:
A) a Treasury bill and a Treasury bond.
B) a Treasury bill and a long-term corporate bond.
C) a Treasury bill and the commercial paper rate.
D) a risky security and a comparable maturity U.S. Treasury security.

Question

Quizplus · Accepted Answer

The best choice is comparing a risky security and a comparable maturity U.S. Treasury security to determine the default risk premium, as this directly measures the extra yield demanded by investors for taking on the additional risk of investing in the risky security. The other choices may be used for other types of analysis, but not specifically for measuring the default risk premium.

The Default Risk Premium at a Certain Point in Time