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 Symbol Component This is the rate for a short-term riskless security when inflation Maturity risk premium Inflation premium Liquidity risk premium is expected to be zero. It is calculated by adding the inflation premium to r* This is the difference between the interest rate on a U.S. Real risk-free rate Treasury bond and a corporate bond of the same profile-that Nominal risk-free rate is, the same maturity and marketability. Default risk premium 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. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss. Symbol DRP IP MRP rRF LP
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 Symbol Component This is the rate for a short-term riskless security when inflation Maturity risk premium Inflation premium Liquidity risk premium is expected to be zero. It is calculated by adding the inflation premium to r* This is the difference between the interest rate on a U.S. Real risk-free rate Treasury bond and a corporate bond of the same profile-that Nominal risk-free rate is, the same maturity and marketability. Default risk premium 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. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss. Symbol DRP IP MRP rRF LP
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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Transcribed Image Text: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
Symbol
Component
This is the rate for a short-term riskless security when inflation
Maturity risk premium
Inflation premium
Liquidity risk premium
is expected to be zero.
It is calculated by adding the inflation premium to r*
This is the difference between the interest rate on a U.S.
Real risk-free rate
Treasury bond and a corporate bond of the same profile-that
Nominal risk-free rate
is, the same maturity and marketability.
Default risk premium
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.
This is the premium that reflects the risk associated with
changes in interest rates for a long-term security.
This is the premium added to the equilibrium interest rate on a
security that cannot be bought or sold quickly enough to
prevent or minimize loss.
Transcribed Image Text:Symbol
DRP
IP
MRP
rRF
LP
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