Crockett Corporation\'s 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.45%

Question

Crockett Corporation's 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.45%. The real risk-free rate is r* = 3.80%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 0.90% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t 1) mc071-1.jpg 0.1%, where t = number of years to maturity. What inflation premium (IP) is built into 5-year bond yields

0.29%

0.20%

0.26%

0.31%

0.25%

0.29%

0.20%

0.26%

0.31%

0.25%

Explanation / Answer

0.25% answer

4.45 = 3.80 + IP +0 + 0 + 0.4 => 0.25

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