7. 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 riskless security that is exposed to changes in inflation. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the rate on short-term US Treasury securities, assuming there is no inflation. 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. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
7. Determinants of market interest rates
Characteristic
|
Component
|
Symbol
|
---|---|---|
This is the rate for a riskless security that is exposed to changes in inflation. | ||
This is the premium that reflects the risk associated with changes in interest rates for a long-term security. | ||
This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. | ||
This is the rate on short-term US Treasury securities, assuming there is no inflation. | ||
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. | ||
It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate. |
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