Posted by **fran taylor** on Friday, January 27, 2012 at 7:24pm.

A thirty year US Treasury bond has a 4.0% interest rate.In contrast a ten year treasury bond has an interest rate of 3.7%. If inflation is expected to average 1.5% points over both the next ten years and thirty years, determine the maturity risk premium for the thirty year bond over the ten years bond.

- finance -
**Expert Ace**, Wednesday, January 9, 2013 at 5:20pm
nominal risk free rate for 10 years = 3.7 + 1.5 = 5.2

nominal risk free rate for 30 years = 4.0 + 1.5 = 5.5

Thus maturity risk premium is 5.5 - 5.2 = 0.3%

It is basically premium for holding bond for longer duration.

- finance -
**Expert Ace**, Wednesday, January 9, 2013 at 5:21pm
r = RR + IP + DRP + MRP + LP or RR + IP + DRP + MRP + LP = r

30 year bond 10 year bond

r = 4.0% r = 3.7%

IP = 1.5% IP = 1.5%

4.0 + 1.5 = 5.5% 3.7 + 1.5 = 5.2%

= 0.3%

30 year

= (1 + 0.04)*(1 + 0.015) - 1

1.04 * 1.015 = 1.0556

1.0556 - 1 = 0.0556 or 5.56%

= 5.56% for nominal risk free interest rate

10 year

= (1 + 0.037)*(1 + 0.015) - 1

1.037 * 1.015 = 1.0525

1.0525 - 1 = 0.05255 or 5.26%

= 5.26% for nominal risk free interest rate

5.56% - 5.26% = 0.3000 or 0.3% (maturity risk preimum)

- finance -
**Anonymous**, Sunday, December 7, 2014 at 12:26pm
n,m

## Answer This Question

## Related Questions

- finance - A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In ...
- Finance - A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In ...
- Finance - 4.A thirty year US treasury bond has a 4.0 percent interest rate.In ...
- Principles of Finance - .A thirty year US treasury bond has a 4.0 percent ...
- Finance - A thirty-year Treasury bond has a 4.0 percent interest rate. In ...
- Finance - P5. A thirty U.S. Treasury bond has a 4.0 percent interest rate. In ...
- fanince - ) A thirty-year U.S Treasury bond has a 4.0 percent interest rate. In ...
- finance - A treasury note with a maturity of four years carries a nominal rate ...
- Finance - A Treasury note with a maturity of four years carries a nominal rate ...
- finance - 12. A Treasury note with a maturity of four years carries a nominal ...

More Related Questions