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Maturity Risk Premium Formula:
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The Maturity Risk Premium is the additional return that investors require for holding longer-term bonds compared to short-term Treasury bills. It compensates investors for the increased risk associated with longer maturities, including interest rate risk and inflation uncertainty.
The calculator uses the Maturity Risk Premium formula:
Where:
Explanation: The difference between the bond yield and T-bill yield represents the premium investors demand for taking on additional maturity risk.
Details: Understanding maturity risk premium is crucial for bond valuation, portfolio management, and assessing the term structure of interest rates. It helps investors make informed decisions about bond investments and duration risk.
Tips: Enter the bond rate and T-bill yield as percentages. Both values must be non-negative. The calculator will compute the maturity risk premium difference.
Q1: What factors influence maturity risk premium?
A: Interest rate expectations, inflation outlook, economic uncertainty, and market liquidity all affect the maturity risk premium.
Q2: Can maturity risk premium be negative?
A: Yes, in unusual market conditions where short-term rates exceed long-term rates (inverted yield curve), the maturity risk premium can be negative.
Q3: How does maturity risk premium relate to yield curve?
A: The maturity risk premium is a key component that shapes the upward slope of a normal yield curve, along with expectations theory and liquidity preference.
Q4: What's the typical range for maturity risk premium?
A: It varies over time, but historically ranges from 1-3% for investment-grade bonds with 10-30 year maturities compared to short-term Treasuries.
Q5: How often should maturity risk premium be calculated?
A: It should be monitored regularly as it changes with market conditions, economic outlook, and monetary policy changes.