Kern Corporation's 5-year bonds yield 7.10% and 5-year T-bonds yield 3.90%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern's bonds is LP = 1.3%, 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 all 5-year bonds?
a. 1.08%
b. 1.00%
c. 1.24%
d. 0.82%
e. 0.92%
