3. Determinants of market interest rates Some characteristics of the determinant

Question

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 characternistic Characteristic Component Real risk-free rate Symbol This is the rate for a short-term riskless security when inflation is expected to be zero. Defauit risk premium DRA s is the premium added as a compensation for the risk that an investor will not get paid in full This is the premium added to the nsk-free rate that reflects _tnat on premium the overage sustained increase in the general level of prices for goods and services expected over the security's entire ife It is celculated by adding the infletion premium to r* Tis is the premium that reflects the rsk associated with changes in interest retes for a long-term secunty This premium is added when a security tacks marketabirLiquidty nsk ore mi becouse t cennot oe bought and sold quickly without losing va ue IP Nominal risk free rot Matunity risk premiumMR

Explanation / Answer

1. risk free rate

2. default risk premium

3. inlfation premiu

4. nominal risk free rate

5. maturity risk premiu

6. liquidity risk premium

all of the options are correct

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