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The real risk-free rate is 3.25%, and inflation is expected to be 2.25% for the next 2 years. A 2-year Treasury security yields 9.00%. What is the maturity risk premium for the 2-year security? Round your answer to two decimal places.

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Answer:

Maturity risk premium 3.50%

Explanation:

Yield rate = 9%

Risk free risk = 3.25%

Inflation rate = 2.25%

Formula for yield rate:

Yield rate = Risk free risk + Inflation rate + Maturity risk premium

r= rfr+ir+Mrp

9.00% = 3.25% + 2.25% + Mrp

0.09 = 0.0325 + 0.0225 + Mrp

0.09 = 0.055 + Mrp

Mrp = 0.09 - 0.055

Mrp = 0.035

Mrp = 3.5%

So the Maturity risk premium is 3.5%

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