Maturity Risk Premium The real risk-free rate is 3%, and inflation is expected to be 2% for the next 2 years. A 2-year Treasury security yields 6.0%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.

1.0%

Explanation:

The real risk - free rate = 3%

inflation for next 2 years = 2%

A 2 - year Treasury security yields = 6.0%

Maturity Risk Premium for 2 - year security = ?

calculate the Maturity Risk Premium:

treasury security yields = real risk - free rate + inflation + Maturity risk premium

6% = 3% + 2% + ?

therefore the Maturity Risk premium (?) = 6% - 5% = 1.0%

hence the Maturity risk premium = 1.0%

The maturity risk premium is 1.0%.

Explanation:

The maturity risk premium or the 2-year security can be calculated as follows:

Maturity Risk Premium = Yield of the treasury note - Nominal risk free Interest rate

Nominal risk free Interest rate = Real risk-free rate of interest + Expected inflation = 3% + 2% = 5%

Therefore;

Maturity Risk Premium = 6.0% - 5.0% = 1.0%

Therefore, the maturity risk premium or the 2-year security is 1.0%.