The Gergen Group's 5-Year Bonds Yield 6

question 10

Multiple Choice

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* = 2.80%, 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?

• A) 1.40%
• B) 1.55%
• C) 1.71%
• D) 1.88%
• E) 2.06%