Calculating maturity risk premium
To figure out the maturity risk premium for your investment, you'll start by identifying the bond you wish to purchase and the maturity date it comes with. For our purposes, let's assume you wish to purchase a 10-year bond.
Next, you'll need to find the yield for risk-free securities with the same duration as the bond you're looking to buy. Treasury securities are considered risk-free because they're backed by the U.S. government. From there, you'll need to find and subtract the rate of the one-year Treasury bill from that of the 10-year Treasury bond. This represents the minimum risk premium for buying a bond with a 10-year maturity.
Let's say the current yield on a one-year Treasury bill is 0.51%, and the current yield on a 10-year Treasury bond is 1.71%. If we subtract 0.51% from 1.71%, we arrive at 1.2% as a baseline maturity risk premium for 10-year bonds.
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