A 2-year Treasury security currently earns 3.18 percent. Over the next two years, the real risk-free rate is expected to be 1.80 percent per year and the inflation premium is expected to be 0.60 percent per year. Calculate the maturity risk premium on the 2-year Treasury security.

Maturity Risk Premium = 0.78%

Explanation:

The maturity risk premium formula can be used here. The formula is:

Where

r is the rate of return of security

is the risk-free rate

i is the inflation premium rate

MRP is the maturity risk premium of security

Given,

r = 3.18% = 0.0318

= 1.80% =0.018

i = 0.6% = 0.006

We need to calculate MRP

Substituting, we get our

In percentage, it will be:

0.0078 * 100 = 0.78%

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