finance

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.

  1. 👍
  2. 👎
  3. 👁
  1. 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.

    1. 👍
    2. 👎
  2. 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)

    1. 👍
    2. 👎
  3. n,m

    1. 👍
    2. 👎

Respond to this Question

First Name

Your Response

Similar Questions

  1. Bus. Math

    What is the effective interest rate of an 8% 13-week Treasury bill? Assume it is a $10,000 Treasury bill, and round your answer to the nearest hundredth percent. A. 8.20% B. 9.00% C. 8.17% D. 8.16% Answer: D??

  2. Math

    The Garraty company has two bond issues outstanding. Both bonds pa $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years and Bond S a maturity of 1 year. A). What will be the value of each of these bonds

  3. history

    Heather bought a ten-year maturity corporate bond when it was issued for $1,000. The bond has an annual interest rate of seven percent and pays interest semi-annually. How much does she receive every six months?

  4. FINANCE

    8. Suppose that the current one-year rate (one-year spot rate) and expected one-year T-bill rates over the following three years (i.e., years 2, 3, and 4, respectively) are as follows: 1R1 = 5 percent, E(2r1) = 6 percent, E(3r1) =

  1. College Finance

    1.A recent edition of The Wall Street Journal reported interest rates of 10.75 percent, 11.10 percent, 11.48 percent, and 11.75 percent for 3-, 4-, 5-, and 6-year Treasury security yields, respectively. According to the unbiased

  2. finance

    1. Yest Corporation's bonds have a 15-year maturity, a 7% semiannual coupon, and a par value of $1,000. The market interest rate (r) is 6%, based on semiannual compounding. What is the bond’s price? 2. A 20-year, $1,000 par

  3. Finance

    Suppose the September CBOT Treasury bond futures contract has a quoted price of 89-09. What is the implied annual interest rate inherent in this futures contract? Assume this contract is based on a 20 year Treasury bond with

  4. Finance

    A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? (Points: 4) The bond is currently

  1. math

    what is the effective interest rate of an 8% 13-week treasury bill? assume it is a $10,00 treasury bill, and round to the nearest hundredth percent

  2. Pre-Calculus

    What is the present value of a $1000 bond which pays $50 a year for 10 years, starting one year from now? Assume interest rate is 6% per year, compounded annually

  3. financial management

    A treasury bond that matures in 10 years has a yield of 6%. A 10 year corporate bond has a yield of 9%. assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk premium on the corporate bond?

  4. FINANCE

    3. Unbiased Expectations Theory One-year Treasury bills currently earn 5.50 percent. You expect that one year from now, one-year Treasury bill rates will increase to 5.75 percent. If the unbiased expectations theory is correct,

You can view more similar questions or ask a new question.