An investor in Treasury securities expects inflation to be 1.8% in Year 1, 2.6% in Year 2, and 3.75% each year thereafter. Assume that the real risk-free rate is 2.35% and that this rate will remain constant. Three-year Treasury securities yield 6.60%, while 5-year Treasury securities yield 8.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.
An investor in Treasury securities expects inflation to be 1.8% in Year 1, 2.6% in Year 2, and 3.75% each year thereafter. Assume that the real risk-free rate is 2.35% and that this rate will remain constant. Three-year Treasury securities yield 6.60%, while 5-year Treasury securities yield 8.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Do not round intermediate calculations. Round your answer to two decimal places.
The Maturity Risk Premium (MRP) is the additional compensation investors require to hold longer-term bonds instead of shorter-term bonds. It is a component of the yield on a bond, which reflects the risk of holding that bond to maturity. Generally, bonds with longer maturities have a higher MRP than those with shorter maturities, as there is a greater risk associated with holding bonds for longer periods of time. This risk arises because longer-term bonds are more exposed to changes in interest rates, inflation, and other macroeconomic factors that can affect the bond's price.
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