Kern Corporation's 5-Year Bonds Yield 7

Multiple Choice

Kern Corporation's 5-year bonds yield 7.30% and 5-year T-bonds yield 4.10%.The real risk-free rate is r* = 2.5%,the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds,the liquidity premium on Kern's bonds is LP = 1.3%,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 all 5-year bonds?

A) 1.20%
B) 1.32%
C) 1.45%
D) 1.60%
E) 1.68%