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.
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
