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 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. 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. 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 is the rate on short-term US Treasury securities, assuming there is no inflation. This is the difference between the interest rate on a US Treasury bond and a corporate bond of the same profile-that is, the same maturity and marketability. Component Symbol PPI
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 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. 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. 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 is the rate on short-term US Treasury securities, assuming there is no inflation. This is the difference between the interest rate on a US Treasury bond and a corporate bond of the same profile-that is, the same maturity and marketability. Component Symbol PPI
Chapter1: Making Economics Decisions
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Transcribed Image Text:# Determinants of Market Interest Rates
Understanding the determinants of nominal interest rates is crucial for comprehending how various factors influence the costs of borrowing and investing. Below is a list of characteristics associated with the determinants of nominal interest rates, along with their components and respective symbols.
## Characteristics, Components, and Symbols
| **Characteristic** | **Component** | **Symbol** |
|--------------------|---------------|------------|
| 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. | | |
| 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. | | |
| 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 is the rate on short-term US Treasury securities, assuming there is no inflation. | | |
| This is the difference between the interest rate on a US Treasury bond and a corporate bond of the same profile—that is, the same maturity and marketability. | | |
*Note: Each characteristic can be expanded to reveal its specific component and symbol, illustrating the detailed aspects of how interest rates are determined in various contexts.*
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