The Real Rate of Interest Over the Next Two Years

question 51

Multiple Choice

The real rate of interest over the next two years is expected to remain at 2% per annum.Inflation is expected to be 1.5% per annum over the next two years.At the last auction,2-year T-Notes were priced to yield 4%.What is the maturity risk premium for two year maturities? (Assume that the T-Notes have no liquidity risk.)

• A) 0.40%
• B) 0.43%
• C) 0.45%
• D) 0.47%
• E) 0.50%

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Definitions:

Friendly Fire

Incidents in which persons are inadvertently harmed or killed by forces from their own side during an armed conflict or military operation.

Bailment

The legal relationship established when one person (the bailor) entrusts their personal property to another (the bailee) for a specific purpose, with the expectation of return.

Bailee

A person or entity that temporarily holds property belonging to another under a bailment agreement, responsible for the safekeeping of the property.

Deliver

To physically transfer an item or to fulfill a promise or obligation.