7. 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 premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. > As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty. This is the rate for a riskless security that is exposed to changes in inflation. 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. 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. It is based on the bond's rating; the higher the rating, the lower the premium added, thus lowering the interest rate. |||