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(Steps Shown) On a given day, the following yields were observed in the financial markets: Security YTM 3-Month Treasury Bill 7.55% 20-year Treasury Bond

Question: On a given day, the following yields were observed in the financial markets:

Security YTM
3-Month Treasury Bill 7.55%
20-year Treasury Bond 8.95%
20-Year Corporate Aaa bond 9.38%
20-Year Corporate Baa bond 10.15%
  1. What is the default risk premium on the Aaa corporate bond?
  2. How can you explain the yield spread on the Aaa and Baa corporate bonds?
  3. How can you explain the yield spread on the Aaa corporate bond and the Treasury bill?

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