The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.00%, and the 6-year Treasury rate is 6.20%. From discussions with your broker, you have determined that expected inflation premium is 2.25% next year, 2.50% in Year 2, and 2.50% in Year 3 and beyond. Further, you expect that real interest rates will be 4.4% annually for the foreseeable future. Calculate the maturity risk premium on the 3-year Treasury security.

Question

Quizplus · Accepted Answer

The maturity risk premium (MRP) can be calculated using the formula: Nominal Rate = Real Rate + Inflation Premium + Maturity Risk Premium. For the 3-year Treasury, the nominal rate is 7.00%, the average expected inflation premium is (2.25% + 2.50% + 2.50%) / 3 = 2.42%, and the real rate is 4.4%. Therefore, MRP = 7.00% - 4.4% - 2.42% = 0.18%, which rounds to 0.10%.

The Wall Street Journal Reports That the Rate on 3-Year