Q9

exam6addoil

why discount rate = Government bond yield + Illiquidity premium instead of discount rate = Corporate Bond Yield (AA-rated) + Illiquidity premium? and also i have hard time to understand "spread over government bonds" thats why we subtract Government bond yield from Corporate bond yield?

Staff-T1

Because a corporate bond yield is not risk free while a govt bond is. You need your discount rate to be the sum of the risk free rate and illiquidity premium.

Spread over government bonds is financial jargon for the difference between the yield of corporate bonds and government bonds