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: Component Symbol Characteristic This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. 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. 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. 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. | 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: Component Symbol | Maturity risk premium Inflation premium Characteristic This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. 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. 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. 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. || Default risk premium Nominal risk-free rate Liquidity risk premium Real risk-free rate 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: Component Symbol TRF IP DRP Characteristic This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. 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. 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. 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. MRP * LP