Interest rate differentialsA maturity risk premium at a certain point in time may be expressed by comparing the interest rates on:
A)a Treasury bill and a Treasury bond
B)a Treasury bill and a long-term corporate bond
C)a Treasury bill and the commercial paper rate
D)a risky security and a comparable maturity U.S.Treasury security
E)none of the above

Question

Quizplus · Accepted Answer

The maturity risk premium is the additional compensation investors require for investing in longer-term bonds as opposed to shorter-term bonds. Therefore, the best choice for expressing the maturity risk premium is comparing the interest rate on a risky security (i.e. a corporate bond) with a comparable maturity U.S. Treasury security, as this reflects the additional risk premium associated with investing in the corporate bond. Choices A-C do not necessarily reflect the additional risk premium associated with investing in longer-term bonds.

Interest Rate DifferentialsA Maturity Risk Premium at a Certain Point