To find the maturity risk premium (MRP) for the 2-year Treasury security, we use the formula:

$\text{Nominal Rate} = (1 + \text{Real Risk-Free Rate})(1 + \text{Inflation Rate}) + \text{MRP}$

Alternatively, we can approximate it as:

$\text{Nominal Rate} \approx \text{Real Risk-Free Rate} + \text{Inflation Rate} + \text{MRP}$

We know the following values:

• Real Risk-Free Rate ($r^*$) = 3% or 0.03
• Expected Inflation Rate ($\text{inflation}$) = 3% or 0.03
• Treasury Security Yield ($\text{Nominal Rate}$) = 7% or 0.07

Now, solving for the maturity risk premium (MRP):

$\text{MRP} = \text{Nominal Rate} - (\text{Real Risk-Free Rate} + \text{Inflation Rate})$

Substitute the known values:

$\text{MRP} = 7\% - (3\% + 3\%)$ $\text{MRP} = 7\% - 6\% = 1\%$

Thus, the maturity risk premium for the 2-year security is 1.0%.

Would you like more details or have any questions?

Here are 5 related questions for further exploration:

1. How does the maturity risk premium change for longer-term securities?
2. What factors influence the real risk-free rate over time?
3. How would an unexpected change in inflation expectations affect Treasury yields?
4. Why is the maturity risk premium often higher for longer-term securities?
5. How does the liquidity premium differ from the maturity risk premium?

Tip: When estimating interest rates, always consider the effect of inflation, as it can significantly impact real returns over time.