The Wall Street Journal reports that the rate on three-year Treasury securities is 7.00 percent, and the six-year Treasury rate is 6.20 percent. From discussions with your broker, you have determined that the expected inflation premium will be 2.25 percent next year, 2.50 percent in year 2, and 2.50 percent in year 3 and beyond. Further, you expect that real interest rates will be 4.4 percent annually for the foreseeable future. Calculate the maturity risk premium on the 3-year Treasury security.

Question

Quizplus · Accepted Answer

The nominal rate on a 3-year Treasury security is 7.00%. The expected inflation premium over the 3 years is the average of 2.25%, 2.50%, and 2.50%, which is 2.42%. The real interest rate is 4.4%. The maturity risk premium is calculated as the nominal rate minus the sum of the real rate and the average inflation premium: 7.00% - (4.4% + 2.42%) = 0.18%, which rounds to 0.10%.

The Wall Street Journal Reports That the Rate on Three-Year