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what is the formula to calculate the maturity risk premium

 
John Mark's Avatar
  • Answered by:John Mark
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Customer Question

what is the formula to calculate the maturity risk premium for a 2 year security? real risk-free rate is 3%, inflation is expected to be 3% for the next 2 years. the 2-year Treasury security yields 6.2%.

Submitted: 1054 days and 22 hours ago.
Category: Finance
Value: $9
Status: CLOSED
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Expert:  John Mark replied 1054 days and 15 hours ago.

hi,

 

The general formula is r = r* + IP + MRP

 

Where

r 2 = 6.2 Security Yield for 2 years

r* = 3 Risk Free Rate

IP2 = (3+3)/2 Inflation Rate

MRP2 = ? Maturity Risk Premium for 2 years

 

r 2= r* + IP2 + MRP2
6.2 = 3 + 3 + MRP2
MRP2 = 0.2

 
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