How to calculate maturity risk premium?
Understand the Problem
The question is asking for the method or formula used to calculate the maturity risk premium, which is a financial concept related to the additional return investors expect for holding a longer-term investment compared to a shorter-term investment.
Answer
Interest rate of bond - Treasury bill yield
The maturity risk premium is calculated by subtracting the yield of a comparable Treasury bill from the interest rate of the bond you are interested in.
Answer for screen readers
The maturity risk premium is calculated by subtracting the yield of a comparable Treasury bill from the interest rate of the bond you are interested in.
More Information
The maturity risk premium compensates investors for the increased risk associated with holding longer-term securities, as they are more exposed to interest rate fluctuations and other economic factors over time.
Tips
A common mistake is not using the correct Treasury bond or bill yield that matches the maturity period of the bond you are comparing.
Sources
- How to Calculate Maturity Risk Premiums - Nasdaq - nasdaq.com
- Maturity Risk Premium | Meaning, Need, Formula and Interpretation - eFinance Management - efinancemanagement.com
- What is a Maturity Risk Premium? - Vintti - vintti.com
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