Determinants of Interest Rete for Individual Securities The with your broker you

Question

Determinants of Interest Rete for Individual Securities The with your broker you have determined that expected ieflstion premium is 2 8O will be 3.65 percent annually for the foreseeable future What is the maturity risk premium on the 6 Wall Street Jourmal reports that the rate on 3-year Treasury securities is 7.30 percent, and the 6-year Tressury rate is 755 percent From discussiona percent next year, 3 05 percent in Year 2, and 3 25 percent in Year 3 and beyond. Further you expect that real interest rates year Treasury security? ? 65% 85% 110% 40%

Explanation / Answer

Solution: 65%

Working:

Real Interest Rate = 3.65%

Nominal return on 6 year T bill = 7.55%

7.55 = 3.65 + 3.25 + maturity Risk premium

Maturity Risk premium = 7.55-3.65-3.25 = 0.65%

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