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A 2-year Treasury security currently earns 1.79 percent. Over the next two years, the real risk-free rate is expected to be 1.35 percent per year and the inflation premium is expected to be 0.35 percent per year. Calculate the maturity risk premium on the 2-year Treasury security. (Round your answer to 2 decimal places.) Maturity risk premium ____.__%

Question

A 2-year Treasury security currently earns 1.79 percent. Over the next two years, the real risk-free rate is expected to be 1.35 percent per year and the inflation premium is expected to be 0.35 percent per year. Calculate the maturity risk premium on the 2-year Treasury security. (Round your answer to 2 decimal places.)

 

Maturity risk premium ____.__%

check_circleAnswer
Step 1

Maturity risk premium can be defined as the additional benefit an investor can earn on bonds having longer maturity period.

Step 2

The formula to calculate maturity risk premium is given below:

Treasury bond yield - Real risk free rate
Maturity risk premium
-Inflation risk premium
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Treasury bond yield - Real risk free rate Maturity risk premium -Inflation risk premium

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Step 3

Substitute 1.79% for treasury bond yield, 1.35% for real risk-free ra...

Maturity risk premium = 1.79%-1.35%-0.35%
=0.09%
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Maturity risk premium = 1.79%-1.35%-0.35% =0.09%

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