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Problem 5-19 Maturity Risk Premiums Assume that the real risk-free rate, r*, is 3% and that inflation is expected to be 7% in Year 1,

Problem 5-19 Maturity Risk Premiums

Assume that the real risk-free rate, r*, is 3% and that inflation is expected to be 7% in Year 1, 6% in Year 2, and 4% thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes; that is, what is MRP5 minus MRP2? Round your answer to two decimal places.

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