Question

70. The term structure of interest rates is primarily based on which three of the following?

I. Interest rate risk premium
II. Real rate of interest
III. Default risk premium
IV. Inflation premium
V. Liquidity premium

A. I, II, and V
B. I, III, and V
C. II, III, and IV
D. I, II, and IV
E. II, IV, and V

Answer 1

The term structure of interest rates is primarily based on interest rate risk premium, real rate of interest, and inflation premium.

Step-by-step explanation:

The term structure of interest rates is primarily based on the following three components:

1. Interest rate risk premium: This is the additional premium that investors demand for bearing the risk associated with changes in interest rates.
2. Real rate of interest: This is the compensation for delaying consumption and represents the pure time value of money.
3. Inflation premium: This reflects the adjustment for an expected rise in the overall level of prices.