Question

Choose the best answer. The Maturity Risk Premium: Group of answer choices a. Is the premium reflecting the possibility of the failure of the borrower to pay its principal and interest payments on time. b. The premium reflecting the risk that unanticipated events will occur over the term of the security. c. Is not a premium reflected in the interest rate that the Federal Government has to pay when it borrows money for 30 years (issues a long term bond). d. All of the statements above are correct. e. Statements b and c are correct.

Answer 1

Answer: b. The premium reflecting the risk that unanticipated events will occur over the term of the security.

Explanation:

The Maturity Risk Premium refers to an additional rate of return that is put on a long term instrument such as a bond to cater for unanticipated events during the time that the bond is to be held.

For example, there is a risk that inflation rates could rise sharply.

This is why the Maturity Risk Premium is important. To ensure that returns are stable even if such events occur.