A 2-year Treasury security currently earns 6.37 percent. Over the next

QUESTION

A 2-year Treasury security currently earns 6.37 percent. Over the next two years, the real interest rate is expected to be 1.2 percent per year and the inflation premium is expected to be 2.6 percent per year.Required:Calculate the maturity risk premium on the 2-year Treasury security.
r = r* IP DRP LP MRP Where r = required return on a security = 6.37 r* = real risk-free rate of interest = 1.2% IP = inflation premium = 2.6% DRP = default risk premium = 0 for Treasury security LP = liquidity¦

emium = very Low for Treasury sec “ assume zero MRP = maturity risk premium ??? So putting values, we get 6.37% = 1.2% 2.6% MRP ie MRP = 2.57%

ANSWER:

CLICK REQUEST FOR  AN EXPERT SOLUTION