The 5-year T-Note yields 6% and the 10-year T-Note yields 7%.Economists predict that real rates and inflation will remain constant over the next ten years at 3% and 2%,respectively.What is the difference between maturity risk premium for the 10-year bond and the 5-year bond? Assume that neither bond's yield includes a liquidity risk premium.

Question

Quizplus · Accepted Answer

Since everything else is held constant, the only difference between the two yields is their different maturity risk premiums. So, the difference in yields is the difference in their maturity risk premiums.

The 5-Year T-Note Yields 6% and the 10-Year T-Note Yields