Maturity Risk Premium
An investor in Treasury securities expects inflation to be 1.55% in Year 1, 2.7% in Year 2, and 4.2% 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 7.65%. What is the difference in the maturity risk premiums (MRPs) on the two securities; that is, what is MRP5 - MRP3? Round your answer to two decimal places.
%
An analyst is evaluating securities in a developing nation where the inflation rate is very high. As a result, the analyst has been warned not to ignore the cross product between the real rate and inflation. A 6-year security with no maturity, default, or liquidity risk has a yield of 13.15%. If the real risk-free rate is 5%, what average rate of inflation is expected in this country over the next 6 years? Round your answer to two decimal places. (Hint: Refer to "The Links Between Expected Inflation and Interest Rates: A Closer Look.")
%