I dont know what formula to use to solve this problem, I can't easily find it...
I dont know what formula to use to solve this problem, I can't easily find it in the text.
A 2-year Treasury security currently earns 1.94 percent. Over the next two years, the real risk-free rate is expected to be 1.00 percent per year and the inflation premium is expected to be 0.50 percent per year. Calculate the maturity risk premium on the 2-year Treasury security.
Homework Answers
Solution-
Real risk free rate =1%
Inflation premium =0.50
Average inflation premium= (0.;50+0.50)/2=0.50
Yield on 2 year treasury security =1.94%
Yield on 2 year treasury securities= risk free rate + inflation premium + maturity risk premium
1.94%=1%+0.5%+ maturity risk premium
Maturity Risk Premium= 1.94%-1%-0.50%
Maturity Risk Premium= 0.44%
Maturity Risk Premium on 2 year treasury security = 0.44%
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