Security Interest rate (%) 10-year US Treasury securities 3.8 10-year AA corporate bond yield 4.4 Type of premium Equity risk premium 8.4 We are asked to calculate the expected return for the consumer credit industry using the bond-yield-plus-risk-premium method. The answer is 3.8% + 8.4% = 12.2%. I have seen definitions that say we can find BYPRP as risk premium + company’s long-term debt. So why do they use the 10-year US Treasury yield (3.8%) and not the 10-year corporate bond yield (4.4%)?
Because it is the equity risk premium, by definition.
Never use the corporate debt in that approach, unless in some cases beyond the scope of the material, which becomes a little different.