Question

Determinants of market interest rates

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 rate on short-term U.S. Treasury securities,
assuming there is no inflation.
It is calculated by adding the inflation premium to r*.
This is the premium added to the real risk-free rate to
compensate for a decrease in purchasing power over time.
This is the premium added as a compensation for the risk
that an investor will not get paid in full.
This premium is added when a security lacks marketability,
because it cannot be bought and sold quickly without losing value.
This is the premium that reflects the risk associated with
changes in interest rates for a long-term security.

Answer 1

The determinants of market interest rates include short-term U.S. Treasury securities, inflation premium, risk premium, default risk premium, and interest rate risk premium.

Step-by-step explanation:

The determinants of market interest rates can be divided into several components:

1. Short-term U.S. Treasury securities: The rate on these securities represents the risk-free rate and is denoted as r*.
2. Inflation premium: It is added to r* to account for the decrease in purchasing power over time.
3. Risk premium: This premium is added to compensate for the risk that an investor will not be paid in full.
4. Default risk premium: It reflects the risk associated with a security's lack of marketability, as it cannot be bought and sold quickly without losing value.
5. Interest rate risk premium: This premium reflects the risk associated with changes in interest rates for a long-term security.

Answer 2

1. Real risk-free rate.

2. Nominal risk free-rate.

3. Inflation premium.

4. Liquidity risk premium.

5. Liquidity risk premium.

6. Maturity risk premium.

Step-by-step explanation:

Market interest rates can be defined as the amount of interests (money) paid by an individual on deposits and other financial securities or investments. The factors that typically affect the market interest rate known as the determinant of market interest rates are;

1. This is the rate on short-term U.S. Treasury securities, assuming there is no inflation: Real risk-free rate r*

2. It is calculated by adding the inflation premium to r*: Nominal risk free rate.

3. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time: Inflation premium.

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

5. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value: Liquidity risk premium.

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