Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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
|
|---|---|---|
| This is the premium that reflects the risk associated with changes in interest rates for a long-term security. | ||
| It changes over time, depending on the expected rate of |
||
| This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. | ||
| It is calculated by adding the inflation premium to r*. | ||
| 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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