QUESTION 1

1. Crockett Corporation's 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.45%. The real risk-free rate is r* = 3.50%, 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) 0.1%, where t = number of years to maturity. What inflation premium (IP) is built into 5-year bond yields?

   	a.	0.62%
   	b.	0.49%
   	c.	0.55%
   	d.	0.64%
   	e.	0.58%