[amp_mcq option1=”2.00%” option2=”21.00%” option3=”0.50%” option4=”7.00%” correct=”option1″]
The correct answer is A. 2.00%.
The market risk premium is the additional return that investors demand for holding risky assets over risk-free assets. It is calculated as the difference between the expected return on a risky asset and the risk-free rate of return.
In this case, the yield on the bond is 7% and the market required return is 14%. Therefore, the market risk premium is 2.00%.
Option B is incorrect because it is the yield on the bond, not the market risk premium.
Option C is incorrect because it is the difference between the market required return and the yield on the bond, which is equal to the market risk premium.
Option D is incorrect because it is the yield on the bond, not the market risk premium.