Question

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

Answer 1

Answer:

The answer is 0.3%

Explanation:

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

Therefore maturity risk premium is 5.5 - 5.2 = 0.3%