Securities The Wall Street Journal reports that the rate on 3-year Treasury secu

Question

Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.40 percent, and the 6-year Treasury rate is 7.45 percent. From discussions with your broker, you have determined that expected inflation premium is 3.05 percent next year, 2.80 percent in Year 2, and 3.40 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.85 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?

A. .55%

B. .20%

C. .80%

D. .15%

Explanation / Answer

Rate of three year treasury secruities = Expected inflation premium of 3 year + Real interest rate + Market premium

7.40% = 3.40% + 3.85% + Market premium

Market premium = 0.074 - 0.034 - 0.0385

Market premium = 0.0015

Market premium = 0.15%

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