Problem 65 Maturity Risk Premium A 2year Treasury security y

Problem 6-5 Maturity Risk Premium A 2-year Treasury security yields 9.75%, what is the maturity risk premium for the 2-year security? Round your ans er to two decimal The real risk-free rate is 2.75% and inflation is expected to be 3.5% for the next 2 years. places.

Solution

              r = r* + IP + MRP

9.75 = 2.75 + 3.5 + MRP

              MRP = 3.5%