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* = 2.4%, the d

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The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bondsyield 4.75%. The real risk-free rate is r* = 2.4%, the default riskpremium 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 thematurity risk premium for all bonds is found with the formula MRP =(t − 1) × 0.1%, where t = number of years to maturity. What is theinflation premium (IP) on 5-year bonds?
a. 1.67% b. 1.95% c. 1.81% d. 1.53% e. 1.39%