Maturity risk premium

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Maturity risk premium (also known by its acronym, MRP) is the premium that must be added to the real risk-free rate of interest to compensate for interest rate risk, which depends on a bond's maturity. Interest rate risk arises from the fact that bond prices decline when interest rates rise. Under these circumstances, selling a bond prior to maturity will result in a capital loss; the longer the term to maturity, the larger the loss.


Definitions

According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),

Maturity risk premium (MRP). The premium that must be added to the real risk-free rate of interest to compensate for interest rate risk, which depends on a bond's maturity. Interest rate risk arises from the fact that bond prices decline when interest rates rise. Under these circumstances, selling a bond prior to maturity will result in a capital loss; the longer the term to maturity, the larger the loss.

According to Fundamentals of Financial Management by Eugene F. Brigham and Joel F. Houston (15th edition),

Maturity risk premium (MRP). A premium that reflects interest rate risk.

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