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15 May, 14:10

Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 6.0%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

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Answers (2)
  1. 15 May, 17:50
    0
    1.0%

    Explanation:

    The real risk - free rate = 3%

    inflation for next 2 years = 2%

    A 2 - year Treasury security yields = 6.0%

    Maturity Risk Premium for 2 - year security = ?

    calculate the Maturity Risk Premium:

    treasury security yields = real risk - free rate + inflation + Maturity risk premium

    6% = 3% + 2% + ?

    therefore the Maturity Risk premium (?) = 6% - 5% = 1.0%

    hence the Maturity risk premium = 1.0%
  2. 15 May, 18:06
    0
    The maturity risk premium is 1.0%.

    Explanation:

    The maturity risk premium or the 2-year security can be calculated as follows:

    Maturity Risk Premium = Yield of the treasury note - Nominal risk free Interest rate

    Nominal risk free Interest rate = Real risk-free rate of interest + Expected inflation = 3% + 2% = 5%

    Therefore;

    Maturity Risk Premium = 6.0% - 5.0% = 1.0%

    Therefore, the maturity risk premium or the 2-year security is 1.0%.
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