Compute the liquidity premium

Reference no: EM1360448

Niendorf Corporation's 5 year bonds yield 6.75% and 5 year T-bonds yield 4.80%. The real risk-free rate is r*=2.75%, the inflation premium for 5-year bonds is IP=1.65%, the default risk premium for Niendorf's bonds is DRP=1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP=(t-1) multiplied by 0.1%, where t=number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?
A.0.49%
B. 0.55%
C. 0.61%
D. 0.68%
E. 0.75%

Reference no: EM1360448

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