The liquidity premium on crocketts bonds is lp 1.25 and, Ask an Expert

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Crockett Corporation's five-year bonds yield 6.85%, and five-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) x 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on five-year bonds?

a) 1.40%

b) 1.55%

c) 1.71%

d) 1.88%

e) 2.06%

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