What is the inflation premium on five-year bonds

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Problem 1: The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 3.2%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) × 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?

Select the correct answer.

a. 1.15%
b. 1.33%
c. 1.21%
d. 1.39%
e. 1.27%

Reference no: EM132765036

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