Question

The Wall Street Journal reports that the rate on three-year Treasury securities is 7.00 percent, and the six-year Treasury rate is 6.20 percent. From discussions with your broker, you have determined that the expected inflation premium will be 2.25 percent next year, 2.50 percent in year 2, and 2.50 percent in year 3 and beyond. Further, you expect that real interest rates will be 4.4 percent annually for the foreseeable future. Calculate the maturity risk premium on the 3-year Treasury security.

Answer 1

Maturity risk for 3 year Treasury security is 0.1%

Explanation:

Given -

Rate of 3 year Treasury security, R3 = 7%

Rate of 6 year Treasury security, R6 = 6.2%

Rate of inflation, Ri = 2.25% next year, 2.5% on 2nd year, 2.5% on 3rd year

Real interest rate, Rint = 4.4%

Maturity risk on 3 year Treasury security, x = ?

Maturity risk for 3 year Treasury security:

R3 = Ri on 3rd year + Rint + x

7% = 2.5% + 4.4% + x

x = 0.1%

Therefore, Maturity risk for 3 year Treasury security is 0.1%