9. Determinants of market interest rates Aa Aa E 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 is the rate on short-term Government of Canada securities, assuming there is no inflation. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than Canada due to lower values of this premium. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the difference between the interest rate on a government bond and a corporate bond of the same profile that is, the same maturity and marketability. 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 is calculated by adding the inflation premium to r*. Component Symbol Real risk-free rate Inflation premium Nominal risk-free rate Liquidity risk premium Default risk premium Maturity risk premium Characteristic This is the rate on short-term Government of Canada securities, assuming there is no inflation. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than Canada due to lower values of this premium. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the difference between the interest rate on a government bond and a corporate bond of the same profile that is, the same maturity and marketability. 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 is calculated by adding the inflation premium to r*. Component Symbol MRP TRF IP DRP Characteristic This is the rate on short-term Government of Canada securities, assuming there is no inflation. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than Canada due to lower values of this premium. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the difference between the interest rate on a government bond and a corporate bond of the same profile- that is, the same maturity and marketability. 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 is calculated by adding the inflation premium to r*
