Determinants of Interest Rate for Individual Securities A 2-year Treasury security currently earns 4.00 percent. Over...
Determinants of Interest Rate for Individual Securities A 2-year Treasury security currently earns 4.00 percent. Over the next two years, the real interest rate is expected to be 2.05 percent per year and the inflation premium is expected to be 1.25 percent per year. What is the maturity risk premium on the 2-year Treasury security?
Homework Answers
RR = Rate of return = 4%
RIR = Real interest rate = 2.05%
IP = Inflation premium = 1.25%
DRP = Default risk premium = 0%
LP = Liquidity premium = 0%
MRP = Maturity risk premium = ?
RR = RIR + IP + DRP + LP + MRP
4% = 2.05% + 1.25% + 0% + 0% + MRP
4% = 3.30% + MRP
MRP = 4% - 3.30%
MRP = 0.70%
*We have taken DRP and LP as 0% because they are not given in the question.
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