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17 November, 09:14

The real risk-free rate is 2.0% and inflation is expected to be 2.75% for the next 2 years. A 2-year Treasury security yields 5.35%. What is the maturity risk premium for the 2-year security

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  1. 17 November, 09:19
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    0.6%

    Explanation:

    From the question above the values given are

    Treasury security rate = 5.35%

    Real risk free rate = 2.0%

    Average inflation rate = 2.75%

    Market risk premium=?

    The market risk premium can be calculated as follows

    Treasury security rate = Real risk rate+Average inflation rate+Market risk premium

    5.35% = 2.0%+2.75%+market risk premium

    5.35% = 4.75%+market risk premium

    5.35%-4.75% = market risk premium

    0.6% = market risk premium

    Market risk premium is 0.6%

    Hence the market risk premium for the 2-year security is 0.6%
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