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:

a. This is the premium that reflects the risk associated with changes in interest rates for a long-term security.
b. 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.
c. 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.
d. This is the rate for a short-term riskless security when inflation is expected to be zero.
e. This is the premium added as a compensation for the risk that an investor will not get paid in full.

Answer 1

Step-by-step explanation:

a. This is the premium that reflects the risk associated with changes in interest rates for a long-term security.

(determinants<>Nominal risk free rate)

( The Symbol<> rRF)

b. 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.

( Determinant<>Inflation premium)

(Symbol<>IP)

c. 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.

( Determinant<>Liquidity risk premium)

( Symbol<> LRP)

d. This is the rate for a short-term riskless security when inflation is expected to be zero.

(Determinant<> Real risk free rate)

( Symbol<>r)

e. This is the premium added as a compensation for the risk that an investor will not get paid in full.

(Determinant<> Default risk premium)

( Symbol<> DRP)