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Calculate the Inflation Premium (IP) on 5-year bonds

Crockett Corporation has a 5-year bond yield of 6.85%, and 5-year T-bond yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for the company's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on the company's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)x 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?

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This solution is comprised of a detailed explanation to calculate what is the inflation premium (IP) on 5-year bonds. Calculations and answers are provided.