Maturity Risk Premium
November 15th, 2022
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?
Please show formula only and answer only, Thanks