Chandler Co.'s 5-year bonds yield 7.25%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% 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 default risk premium (DRP) on Chandler's bonds?

Select the correct answer.

a. 1.21%

b. 1.28%

c. 1.35%

d. 1.14%

e. 1.07%