Assume that the real risk free rate, r*, is 3 percent an that inflation is expected to be 8 percent in year 1,5 percent in year 2, and 4 percent thereafter. Assume also that all treasury securities are highly liquid and free of default risk. If a 2 year and 5 year treasury notes both yield 10 percent, what is the difference in the maturity risk premium on the two notes: that is what is MRP1 minus MRP2?
