Question: The Gergen Group's 5 - year bonds yield 6 . 8 5 % , and 5 - year T - bonds yield 4 . 7

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*=4%, 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 =(t 1)0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?

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