Question: I am having problems understanding how to solve this. I have the answer, its the method I am looking for. thanks! The Gergen Group's 5-year

I am having problems understanding how to solve this. I have the answer, its the method I am looking for. thanks!

The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t1)0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?

1.88%

b. 1.40%

c. 1.71%

d. 1.55%

2.06%

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