Some characteristics of the determinants of nominal interest rates are listed as

Question

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 It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption. 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. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. This is the rate for a riskless security that is exposed to changes in inflation. As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty It is based on the bond's marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate.

Explanation / Answer

characteristics

component

Symbol

1-

real risk free rate

rRf

2-

default risk premium

DRP

3-

Inflation premium

IP

4-

Nominal risk free rate

r*

5-

maturity risk premium

MRP

6-

Liquidity risk premium

LRP

characteristics

component

Symbol

1-

real risk free rate

rRf

2-

default risk premium

DRP

3-

Inflation premium

IP

4-

Nominal risk free rate

r*

5-

maturity risk premium

MRP

6-

Liquidity risk premium

LRP

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