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Squire Inc.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 4.80%. The real risk-free rate...

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Finance

Squire Inc.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% 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 Squire's bonds?

Select the correct answer.

a. 1.40%
b. 1.00%
c. 1.60%
d. 1.20%
e. 1.80%

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