An investor in Treasury securities expects inflation to be 2.1% in Year 1, 2.7% in Year 2, and 3.65% each year thereafter. Assume that the real risk-free rate is 1.95% and that this rate will remain constant. Three-year Treasury securities yield 5.20%, while 5-year Treasury securities yield 6.00%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is ?

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Q: Calculate the security’s default risk premium.

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A: Computation of the yield:Hence, the yield is 8.58%.

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A: The calculation is shown:

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A: Maturity risk premium  = 0.3(T-1)% = .3 * (6.4% - 1%) =1.62%