Crockett Corporation's 5-Year Bonds Yield 6 $\times$ 01%, Where T = Number of Years to Maturity

question 23

Multiple Choice

Crockett Corporation's 5-year bonds yield 6.85%, and 5-year government 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) $\times$ 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%

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