Question

The real risk-free rate is 2.0% and inflation is expected to be 2.75% for the next 2 years. A 2-year Treasury security yields 5.35%. What is the maturity risk premium for the 2-year security

Answer 1

0.6%

Step-by-step explanation:

From the question above the values given are

Treasury security rate= 5.35%

Real risk free rate= 2.0%

Average inflation rate= 2.75%

Market risk premium= ?

The market risk premium can be calculated as follows

Treasury security rate= Real risk rate+Average inflation rate+Market risk premium

5.35%= 2.0%+2.75%+market risk premium

5.35%= 4.75%+market risk premium

5.35%-4.75%= market risk premium

0.6%= market risk premium

Market risk premium is 0.6%

Hence the market risk premium for the 2-year security is 0.6%