component : Inflation, default , nominal, real, liquidity, maturity Symbol: IP,
ID: 2742906 • Letter: C
Question
component : Inflation, default , nominal, real, liquidity, maturity
Symbol: IP, Drp, lp, r*, r rf,mrp
need some help with the above problem please provide the explanation
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 on short-term U.S. Treasury securities, assuming there is no inflation. 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. 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. 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. 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
Answer for question no.1:
Interest paid on short term us treasury securities is the risk free interest rate and symbol is r rf. As there is no inflation this is real risk free interest rate. Hence, this is the real rate.
Answer for question no.2:
The difference between interest rate on treasury bond and corporate bond is called default risk premium i.e., Default and the symbol is Drp.
Answer for question no.3:
This is called the maturity premium. Because of the uncertainity with the value of the bonds, due to changes in interest rates. The symbol is mrp.
Answer for question no.4:
The interest rate are lower than the interest rates in US due to less inflation premium.The symbol is IP. As the inflation is expected to be low, premium that is added due to inflation risk is less so, the result is less interest rates.
Answer for question no.5:
Nominal rate of interest rate is the interest rate that is exposed to the effects of inflation. Hence, the answer is nominal and the symbol is r*.
Answer for question no.6:
Liquidity premium is the premium that is added in case the security is having less liquidity and the symbol is ip.
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