Question

Keep the Highest / Attempts: 13. Problem 6.12 Click here to read the Book: The Determinants of Market Interest Rates MATURITY RISK PREMIUM An investor in Treasury securities expects Inflation to be 2.5% in Year 1, 3.45% in Year 2, and 4.35% each year thereafter. Assume that the real risk-free rate is 2% and that this rate will remain constant. Three-year Treasury securities yield 6.95%, wie 5-year Treasury securities yield 7.55% What is the difference in the maturity risk premiums (MRP) on the two securities that is what is MRP MRP3? Do not round Intermediate calculations, Round your answer to two decimal places

Answer 1

Solutron Ac given, An investor in treasu to be inar sewrites expects in ftaten 3.45 Hear a eachyear thneafta = 4,35 % > Real Riskfru nato eld = 6.95 % sewritisyes seurihes 7.55 Demard Oohon in Maturi Rsk renium= MRPs-MR -? iteante CalcuatimMatuoi R Premium for 3Rart he iu Calutuble e mortwri seunbes R Pemium seumhes ears Bond yield Risk fre Rate+ intation +Mab Rtr Prenium 14 RIsu ree Ra Now we have Bend yuld 3

we wiu comþnte tveage antatm n a Nmin ear2 OnHatmin ear3 Avirageintato 1 3 agintlaton a5 3.45 % 435% 3 ivage intahon 10.3 Now but 3.43 17 the value n the fermnla., 2% 3.43% MatuniRiskremiang MRP) .95 695% 15.43 + MRP mRP f3years Aeuurities = 6.95%-5.43% 1.52. Rsk Premium trys = 152 % matuiy Calculatimmatum Rick Bemium fer 5 eaeurites IV ination = 4eari Tinear2 tmyars tnearyfnjers Averageintahin d5% + 345% + u.a5%, +4.35% +4.35 a 3

Avenaga tmtlation9-300 % Novo Putti the vralne Inthe formnla Bend RK rao Rato intlationMatarily Rt Premlum 755% /. +3.80 '% + MRP . MRP7 55 % 5-00 75 % Matan R emium frsy es 75 Calulation Biteunce tn maturity RNK Premium (MRPS-MRPS Dittnonisin MRP- MRPS-mRfs Dtenu in MRP -75 % - 152%= 0.23% nu in MRP 0. 23 313