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Chandler Co.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 5.15%. The real risk-free rate is...

Chandler Co.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% 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 default risk premium (DRP) on Chandler's bonds?

Select the correct answer.

a. 1.60%
b. 1.10%
c. 1.35%
d. 1.85%
e. 0.85%
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