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: Symbol LP IP Characteristic This is the premium added as a compensation for the risk that an investor will not get paid in full. 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. 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 calculated by adding the inflation premium to r* This is the rate on short-term US Treasury securities, assuming there is no inflation. 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. Component Liquidity risk premium Real risk-free rate Nominal risk-free rate Maturity risk premium Inflation premium Default risk premium Liquidity risk premium Grade It Now Save & Continue Continue without saving 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: Symbol Component Liquidity risk premium MRP Inflation premium | TRP Characteristic This is the premium added as a compensation for the risk that an investor will not get paid in full. 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. 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 calculated by adding the inflation premium to r*. This is the rate on short-term US Treasury securities, assuming there is no inflation. 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. IP > > > DRP