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 This is the premium added to the risk free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security s entire life This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss 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 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 calculated by adding the inflation premium to r It is based on the bond s rating the higher the rating the lower the premium added thus lowering the interest rate Component Symbol