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4. A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year...

4. A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury bond has an interest rate of 3.7 percent. If inflation is expected to average 1.5 percentage points over both the next ten years and thirty years, determine the maturity risk premium for the thirty-year bond over the ten-year bond.
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Answer #1

Solution

Nominal return= Real return+ Inflation premium+default risk premium+maturity risk premium+liquidity premium

Inflation premium= 1.5

Since other premiums not given therefore they can be considered 0

For thirty year bond

4= 1.5+ maturity risk premium

maturity risk premium= 2.5

For 10 year bond

3.7= 1.5+maturity risk premium

maturity risk premium= 2.2

Thur the maturity risk premium for 30 years over 10 years = 2.5-2.2

=.3

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