Aa Aa 3. Determinants of market interest rates some characteristics of the deter

Question

Aa Aa 3. Determinants of market interest rates some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the rate for a short-term riskless security when inflation is expected to be zerc. This is the difference between the interest rate on a U.S. Treasury bond and a corporate bond of the same profile-that is, the same maturity and marketability. This is the premium added to the risk-free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security's entire life. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss. This is the rate on a Treasury bill or a Treasury bond Default risk pre Liquidity risk premium Nominal risk-free rate Infation premium Maturity risk premiunm Real risk-free rate

Explanation / Answer

Characteristic Component Symbol This is the rate for a short-term riskless security when inflation is expected to be zero Real Risk-Free Rate r This is the difference between interest rate on a US treasury bond and a corporate bond of the same profile that is the same maturity and maketability Default Risk Premium DRP This is the premium added to the risk free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the secuirty's entire life Inflation Premium IP This is the premium that reflects the risk associated with changes in interest rates for a long-term security Maturity Risk Premium MRP This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimise loss Liquidity Risk Premium LP This is the rate on a Treasury bill or a Treasury bond Real Risk-Free Rate r

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