To calculate the default risk premium (DRP) on the corporate bond, we need to use the following relationship for the yield on corporate bonds:

$\text{Corporate bond yield} = \text{T-bond yield} + \text{Default risk premium} + \text{Liquidity premium} + \text{Maturity risk premium}$

We are given the following dataTo calculate the default risk premium (DRP) on the corporate bond, we need to use the following relationship for the yield on corporate bonds:

$\text{Corporate bond yield} = \text{T-bond yield} + \text{Default risk premium} + \text{Liquidity premium} + \text{Maturity risk premium}$

We are given the following

• T-bond yield = 6.3%
• Corporate bond yield = 8.5%
• Maturity risk premium (MRP) = 1.3% (same for both T-bonds and corporate bonds)
• Liquidity premium (LP) on corporate bonds = 0.5%, and for T-bonds = 0% (no liquidity premium)

Now, rearranging the formula to solve for the default risk premium (DRP):

$\text{Default risk premium} = \text{Corporate bond yield} - \text{T-bond yield} - \text{Liquidity premium} - \text{Maturity risk premium}$

Substituting the given values:

$\text{Default risk premium} = 8.5\% - 6.3\% - 0.5\% - 1.3\%$

Let's calculate that:

$\text{Default risk premium} = 8.5\% - 6.3\% - 0.5\% - 1.3\% = 0.4\%$

So, the default risk premium on the corporate bond is 0.4%.

This is quite far from the provided answer choices, so there might be an error. Let me check again or verify...