Interest rates A 2-year Treasury security currently earns 5.25 percent. Over the next two years, the real interest rate is expected to be 3.00 percent per year and the inflation premium is expected to be 2.00 percent per year. What is the maturity risk premium on the 2-year Treasury security?

Question

Quizplus · Accepted Answer

The nominal interest rate is the sum of the real interest rate, the inflation premium, and the maturity risk premium. Here, 5.25% = 3.00% + 2.00% + Maturity Risk Premium, so the maturity risk premium is 0.25%.

Interest Rates a 2-Year Treasury Security Currently Earns 5