An investor in Treasury securities expects inflation to be 2.45% in Year 1, 3% in Year 2, and 4.25% each year thereafter. Assume that the real risk-free rate is 2.25%, and that this rate will remain constant. Three-year Treasury securities yield 6.20%, while 5-year Treasury securities yield 7.65%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is eqMRP_5 – MRP_3 /eq?

Yields on bonds are determined by a variety of factors. The real risk free rate is the compensation for the pure time value of money. The risk premium is the additional return required by investors for the bearing of additional risks.

The difference in maturity risk premiums is 1.04%.

We can use the following formula to compute implied maturity risk premium for each bond first, and then compute the difference. Bond yield could be decomposed as follows:

For 3-year bond, the average inflation = (2.45% + 3% + 4.25%) / 3 = 3.23%. Real interest rate is 2.25%, and the bond yield is 6.20%. Therefore we have:

For 5-year bond, the average inflation = (2.45% + 3% + 4.25% * 3) / 5 = 3.64%. Real interest rate is 2.25%, and the bond yield is 7.65%. Therefore we have:

Therefore, the difference in maturity risk premium = 1.76% – 0.72% = 1.04%.

Our experts can answer your tough homework and study questions.

How to Calculate Yield to Maturity: Definition, Equation & Example

Present and Future Value: Calculating the Time Value of Money

How to Calculate the Rate of Return: Definition, Formula & Example

How to Calculate Payback Period: Method & Formula

Focus on Personal Finance: Online Textbook Help

DSST Money & Banking: Study Guide & Test Prep

Special Enrollment Examination (SEE): Exam Prep & Study Guide

UExcel Principles of Finance: Study Guide & Test Prep

Introduction to Financial Accounting: Certificate Program

Financial Accounting: Skills Development & Training

UExcel Financial Accounting: Study Guide & Test Prep

Introduction to Political Science: Help and Review

Explore our homework questions and answers library

© copyright 2003-2019 m. All other trademarks and copyrights are the property of their respective owners. All rights reserved.

Congratulations, you are eligible for the Family Plan

My child is studying for a credit granting exam

Youll use this email to administer your student accounts.

This email is already in use with a student account. In order to use this email as the parent login to your Family Plan, you need tolog in to your students account and change the email.

1 ng-bind=(cart.product.billingIntervalCount) +

1 ng-bind=(regFormCtrl.$scope.cart.product.billingIntervalCount) +

1 ng-bind=(cart.product.billingIntervalCount) +

1 ng-bind=(regFormCtrl.$scope.cart.product.billingIntervalCount) +

= 0

Watch 5 minute video clips, get step by step explanations, take practice quizzes and tests to master any topic.

Get assistance in any subject, from tough homework to finals. Our tutors have you covered!

= 0

Detailed goal tracking and progress reporting

Free parent account. Oversee one or more separate student accounts

account. Add additional accounts after sign up

Easily view each students lesson progress and quiz scores

Enroll individual students in courses and set study goals

Sign up and access a network of thousands of experts.

Watch 5 minute video clips, get step by step explanations, take practice quizzes and tests to master any topic.

I love the way expert tutors clearly explains the answers to my homework questions. Keep up the good work!

Just a few seconds while we find the right plan for you

An investor in Treasury securities expects inflation to be 2.45% in Year 1, 3% in Year 2, and…