A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

Question

Quizplus · Accepted Answer

The maturity risk premium can be calculated by subtracting the expected real interest rate and the inflation premium from the total yield of the security. Given a total yield of 5.13%, expected real interest rate of 2.15% per year, and an inflation premium of 1.75% per year, the calculation is as follows: 5.13% - (2.15% + 1.75%) = 1.23%.

A Two-Year Treasury Security Currently Earns 5