Information regarding maturity risk premium

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Assume that the real risk-free rate, r, is 3 percent and that inflation is expected to be 8 percent in Year 1, 5 percent in Year 2 and 4 percent thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2 year and 5 year Treasury notes both yield 10 -percent what is the difference in the maturity risk premiums (MRPs) on the two notes, that is, what is MRP5 minus MRP2?

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Reference no: EM13115730

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