Final answer:
The statement that a positive maturity risk premium raises interest rates on long-term bonds compared to short-term bonds is true. The maturity risk premium compensates investors for the greater uncertainty over a longer period, affecting the yield curves of bonds.
Step-by-step explanation:
The statement is true. A positive maturity risk premium does have the effect of raising interest rates on long-term bonds relative to those of short-term bonds. This is because investors demand a higher return for the increased uncertainty and potential higher inflation over the longer horizon.
For example, 10-year Treasury bonds and AAA-rated corporate bonds, both of which are subject to interest rate fluctuations, often see that interest rates for long-term bonds are higher than those for short-term bonds due to this maturity risk premium. Additionally, macroeconomic factors such as budget deficits can cause long-term interest rates to rise. A consensus estimate indicates that a 1% increase in budget deficit as a percentage of GDP can lead to a 0.5-1.0% increase in long-term interest rates. These dynamics are an essential component of the bond market and are reflected in yield curves that investors analyze for understanding interest rate risks and bond valuation.