Questions: Chapter MC, Section .06, Problem 072. Algo inflation premium (IP) is 1.50%. What is the maturity risk premium (MRP) on all 5-year bonds? a. 2.30% b. 1.10% c. 1.50% d. 1.80% e. 1.20%

Solution Steps

To determine the maturity risk premium (MRP) on all 5-year bonds, we need to understand the relationship between the given inflation premium (IP) and the options provided. The problem does not provide a direct formula or additional information, so we assume that the MRP is one of the options listed. We will compare the given IP with each option to identify the most reasonable MRP based on typical financial assumptions or context.

We are given the inflation premium (IP) as \( IP = 1.50\% \). We need to determine the maturity risk premium (MRP) for 5-year bonds from the provided options.

The options for the maturity risk premium (MRP) are:

• A: \( 2.30\% \)
• B: \( 1.10\% \)
• C: \( 1.50\% \)
• D: \( 1.80\% \)
• E: \( 1.20\% \)

To find the most reasonable MRP, we compare each option with the given inflation premium. Typically, the MRP should be higher than the inflation premium to account for the additional risk associated with longer maturities.

Among the options:

• \( 2.30\% \) is significantly higher than \( 1.50\% \).
• \( 1.10\% \) and \( 1.20\% \) are lower than \( 1.50\% \).
• \( 1.50\% \) is equal to the inflation premium.
• \( 1.80\% \) is slightly higher than \( 1.50\% \).

Given this analysis, the most reasonable choice for the MRP that reflects a premium for maturity risk while being higher than the inflation premium is \( 1.80\% \).

Final Answer