Difference in the maturity risk premiums, Accounting Basics

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Difference in the maturity risk premiums

Problem:

An investor in Treasury securities expects inflation to be 2% in Year 1, 3.2% in Year 2, and 3.75% each year thereafter. Assume that the real risk-free rate is 2.1%, and that this rate will remain constant. Three-year Treasury securities yield 6.10%, while 5-year Treasury securities yield 8.10%.

Requirement:

Question: What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3?

Note: Show supporting computations in good form.

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Accounting Basics: Difference in the maturity risk premiums

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Accounting Basics: Difference in the maturity risk premiums

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