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r = RR + IP + DRP + MRP + LP or RR + IP + DRP + MRP + LP = r 30 year bond 10 year bond r = 4.0% r = 3.7% IP = 1.5% IP = 1.5% 4.0 + 1.5 = 5.5% 3.7 + 1.5 = 5.2% = 0.3% 30 year = (1 + 0.04)*(1 + 0.015) - 1 1.04 * 1.015 = 1.0556 1.0556 - 1 = 0.0556 or 5.56% =
nominal risk free rate for 10 years = 3.7 + 1.5 = 5.2 nominal risk free rate for 30 years = 4.0 + 1.5 = 5.5 Thus maturity risk premium is 5.5 - 5.2 = 0.3% It is basically premium for holding bond for longer duration.
