Kay Corporation's 5-Year Bonds Yield 6

Multiple Choice

Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%.The real risk-free rate is r* = 2.5%,the inflation premium for 5-year bonds is IP = 1.50%,the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds,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 liquidity premium (LP) on Kay's bonds?

A) 0.36%
B) 0.41%
C) 0.45%
D) 0.50%
E) 0.55%