Question

The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.20 percent, and the 6-year Treasury rate is 7.45 percent. From discussions with your broker, you have determined that expected inflation premium is 2.70 percent next year, 2.95 percent in Year 2, and 3.15 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.60 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security

Answer 1

The maturity risk premium on the six year is 0.45%

Step-by-step explanation:

For computing the maturity risk premium, we need to use the formula which is shown below:

3-year treasury securities = 3-year inflation period + 3-year real interest rate + maturity risk premium

7.20% = 3.15% + 3.60% + maturity risk premium

7.20% = 6.75% + maturity risk premium

Maturity risk premium = 7.20% - 6.75%

Maturity risk premium = 0.45%

Hence, the maturity risk premium on the six year is 0.45%