The real risk-free rate is 2%, and inflation is expected to be 4% for the next 2 years. A 2-year Treasury security yields 7.3%. What is the maturity risk premium for the 2-year security? Round your answer to one decimal place.
Answer:- 1.3%
Explanation:-
Yield on 2-year treasury security = Real risk-free + Inflation rate for next two years + Maturity Risk Premium for 2 year security
7.3% = 2% + 4% + Maturity Risk Premium
So, Maturity Risk Premium = 7.3% - ( 2% + 4%)
=7.3% - 6%
=1.3%
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