Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% 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 Squire's bonds?
A. 0.49%
B. 0.55%
C. 0.61%
D. 0.68%
E. 0.75%
Answer: E
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