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The real risk-free rate is 3.0% and inflation is expected to be 3.25% for the next...

The real risk-free rate is 3.0% and inflation is expected to be 3.25% for the next 2 years. A 2-year Treasury security yields 6.85%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

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Answer #1

Real-Risk Free rate = 3%

Calculating the maturity risk premium for the 2-year security:-

rd = r* + IP + DRP + LP + MRP

rd = Required rate of 2-year Treasury security yields = 6.85%

r* = real risk free return = 3%

IP = Inflation Premium = 3.25%

MRP = Maturity Risk Premium

6.85% = 3% + 3.25 + MRP

MRP = 0.6%

So, the maturity risk premium for the 2-year securit is 0.6%

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