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John Mark
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How to calculate maturity risk premium?

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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Question

What is the formula to calculate the maturity risk premium for a two year security? The 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: 6 years ago.
Category: Finance
Expert:  John Mark replied 6 years ago.

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