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25 December, 14:30

A 2-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the 2-year Treasury security?

a. 0.25%

b. 1.00%

c. 1.05%

d. 5.00%

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Answers (1)
  1. 25 December, 17:44
    0
    a. 0.25%

    Explanation:

    The maturity premium will be an addition to the rate to make up for the change the issuer do not meet their obligation in time therefore it makes more attractive the investment to negate the risk aversion of potential investor

    givne the rate of 5.25

    as there is a 2% inflation premium then the rate is 3.25

    as 3% is considered the real rate of returnexpected by the market ay difference is a premium for another types of risk in this case, maturity risk.
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