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Maturity Risk premium

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An investor in Treasury securities expects inflation to be 2.5% in Year1,3. 2% in Year 2, and 3.6% each year thereafter. Assume that the real risk-free rate is 2.75%, and that this rate will remain constant over time. Three-year Treasury securities yield 6.25%, while 5-year Treasury securities yield 6.80%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is MRP5-MRP3?

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Solution Summary

The expert examines maturity risk premiums. The expected inflation is determined.

Solution Preview

From the function:
nominal rate = real risk-free rate + expected inflation + risk premium
MRP5 = ...

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