This concept is generally applicable to bonds. The maturity risk premium is a premium to investors for holding bonds for a longer duration. The maturity risk premium calculator is an online aid in the calculation of such a premium.
There is always a possibility of an increment in the interest rate before the maturity of bonds. Suppose an investor buys a bond at an interest rate of say 2% for 5 years. And, at the time of maturity, the rate increases to 3.15%. Here, the issuer will only pay the pre-decided interest rate to the investor, which is less than the actual interest rate prevailing in the market. This risk is interest rate risk. The maturity risk premium offsets this interest rate risk by increasing the rate on long-term bonds.
The following formula can be used to calculate the maturity risk premium.
Maturity Risk Premium = Interest Rate of Bond – Treasury Bill Yield
Maturity Risk Premium Calculator
How to calculate using Calculator?
The following inputs are to be provided to the calculator
Interest Rate of Treasury Bill – It is the rate of interest applicable on the bond in which you have invested for n number of years plus the year of maturity.
Treasury Bill Yield – It is the rate of one year to determine the maturity risk premium for making an investment for n number of years.
