How to find maturity risk premium?
Understand the Problem
The question is asking about the maturity risk premium, which is the additional yield that investors require for holding a longer-term investment compared to a shorter-term one. It typically involves understanding how yields on different maturities are compared and how to calculate this premium.
Answer
Use the formula 0.1(t-1)% where t is the security's maturity.
The final answer is obtained using the formula 0.1(t-1)% where t is the security's maturity.
Answer for screen readers
The final answer is obtained using the formula 0.1(t-1)% where t is the security's maturity.
More Information
Maturity risk premium compensates investors for the increased risk associated with holding longer-term securities due to factors like interest rate changes and inflation.
Tips
A common mistake is not subtracting 1 from the maturity (t) before applying the formula. Always ensure you use the correct value for t.
Sources
- How to Calculate Maturity Risk Premiums | Nasdaq - nasdaq.com
- What is a Maturity Risk Premium? - Vintti - vintti.com
- Maturity Risk Premium | Meaning, Need, Formula and Interpretation - efinancemanagement.com
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