where t = number of years to maturity. What is the liquidity premium (LP) on Kay’s bonds? a. 0.36% b. 0.50% c. 0.45% d. 0.41% e. 0.55%

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Kay Corporation’s 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay’s bonds is DRP = 1.30% 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 Kay’s bonds?

a. 0.36%
b. 0.50%
c. 0.45%
d. 0.41%
e. 0.55%

 

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