Question

A 2-year Treasury security currently earns 3.18 percent. Over the next two years, the real risk-free rate is expected to be 1.80 percent per year and the inflation premium is expected to be 0.60 percent per year. Calculate the maturity risk premium on the 2-year Treasury security.

Answer 1

Maturity Risk Premium = 0.78%

Step-by-step explanation:

The maturity risk premium formula can be used here. The formula is:

`r=r_f+i+MRP`

Where

r is the rate of return of security

`r_f` is the risk-free rate

i is the inflation premium rate

MRP is the maturity risk premium of security

Given,

r = 3.18% = 0.0318

`r_f` = 1.80% =0.018

i = 0.6% = 0.006

We need to calculate MRP

Substituting, we get our answer:

`r=r_f+i+MRP\\0.0318=0.018+0.006+MRP\\0.0318=0.024+MRP\\MRP=0.0078`

In percentage, it will be:

0.0078 * 100 = 0.78%