Description of this paper

An investor in Treasury securities expects inflation to be 3 percent in

Description

solution


Question

An investor in Treasury securities expects inflation to be 3 percent in Year 1, 4 percent in Year 2, and 5 percent each year thereafter. Assume that the real risk-free rate is 3 percent, and that this rate will remain constant over time. Two-year Treasury securities yield 6.8 percent, while four-year Treasury securities yield 7.6 percent. What is the difference in the maturity risk premiums (MPs) on the two securities, that is, what is MP4 - MP2?

 

Paper#26153 | Written in 18-Jul-2015

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