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

Question

3. Determinants of market interest rates Aa Aa 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 zero. 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 premium Liquidity risk premium Nominal risk-free rate Inflation premium Maturity risk premium Real risk-free rate Grade it Now

Explanation / Answer

1)real risk free rate is rate for a short term riskless security when inflation is expected to be zero

2)Default fisk premium is the difference between the interest rate on a U.S. Treasury bon and a corporate bond of the same profile - that is, the same maturity and marketability

3)Inflation Premium-This is a premium added to the real risk free rate that reflects the average sustained increase in the general level of prices of goods and servics expected over securities entire life

4)Maturity Risk Premium-This is the premium that reflects the risk associated with changes in interest rates for a long term security

5)Liquidity Risk Premium-This is the premium added to the equilibrium interest rate on security that cannot be bought or sold quickly enough to prevent or minimize loss

6)Nominal Risk free rate - Rate on a treasury bill

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