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 It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption. This is the rate on a Treasury bill or a Treasury bond. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond's credit rating; the higher the rating, the lower the premium added, thus lowering the interest rate. 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. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the security, this premium is added as a compensation for this uncertainty. Component Real risk-free rate Grade It Now Symbol Save & Continue
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 It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption. This is the rate on a Treasury bill or a Treasury bond. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is based on the bond's credit rating; the higher the rating, the lower the premium added, thus lowering the interest rate. 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. As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain over the life of the security, this premium is added as a compensation for this uncertainty. Component Real risk-free rate Grade It Now Symbol Save & Continue
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
It changes over time, depending on the expected rate of return on productive assets
exchanged among market participants and people's time preferences for consumption.
This is the rate on a Treasury bill or a Treasury bond.
This is the premium added to the real risk-free rate to compensate for a decrease in
purchasing power over time.
It is based on the bond's credit rating; the higher the rating, the lower the premium
added, thus lowering the interest rate.
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.
As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices
rise. Because interest rate changes are uncertain over the life of the security, this
premium is added as a compensation for this uncertainty.
Component
Real risk-free rate
Grade It Now
Symbol
Save & Continue
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