7-12 MATURITY RISK PREMIUM An investor in Treasury securities expects inflation to be 2.5% in Year 1, 3.2% in Year 2, and 3.6% each year there- after. Assume that the real risk-free rate is 2.75% and that this rate will remain constant. Three-year Treasury securities yield 6.25%, while 5-year Treasury securities yield 6.80%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP - MRP,?
7-12 MATURITY RISK PREMIUM An investor in Treasury securities expects inflation to be 2.5% in Year 1, 3.2% in Year 2, and 3.6% each year there- after. Assume that the real risk-free rate is 2.75% and that this rate will remain constant. Three-year Treasury securities yield 6.25%, while 5-year Treasury securities yield 6.80%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP - MRP,?
Chapter5: The Cost Of Money (interest Rates)
Section: Chapter Questions
Problem 19PROB
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Transcribed Image Text:7-12
MATURITY RISK PREMIUM An investor in Treasury securities expects
inflation to be 2.5% in Year 1, 3.2% in Year 2, and 3.6% each year there-
after. Assume that the real risk-free rate is 2.75% and that this rate will
remain constant. Three-year Treasury securities yield 6.25%, while
5-year Treasury securities yield 6.80%. What is the difference in the
maturity risk premiums (MRPs) on the two securities; that is, what is
MRP - MRP,?
5
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