Below the picture of the question you can find a "word bank" where I wrote out all the drop down options in each select box in the passage. Please choose the correct answer. Choices: pure / real / nominal short term / long term / intermediate term lower / greater smaller / larger less / more less / more rise / decline / vary reinvestment / interest / compound liquidity / maturity / inflation reinvestment / interest / compound interest / principle less / more

Attempts: Average: /16 6. 6: Bonds Valuation: Determinants of Market Interest Rate Bonds Valuation: Determinants of Market Interest Rate risk-free The interest rate on debt, rd, is equal to the real risk-free rate plus an inflation premium plus a default risk premium plus a liquidity premium plus a maturity risk premium. The interest rate on debt, rd, is also equal to the -Select- rate plus a default risk premium plus a liquidity premium plus a maturity risk premium. The real risk-free rate of interest may be thought of as the interest rate on -Select U.S. Treasury securities in an inflation-free world. A Treasury Inflation-Protected Security (TIPS) is free of most risks, and its value increases with inflation. Short-term TIPS are free of default, maturity, and liquidity risks and of risk due to changes in the general level of interest rates. However, they are not free of changes in the real rate. Our definition of the risk-free rate assumes that, despite the recent downgrade, Treasury securities have no meaningful default risk. The inflation premium is equal to the average expected inflation rate over the life of the security. the bond's risk of default, the higher the market rate. The average default risk premium varies over Default means that a borrower will not make scheduled interest or principal payments, and it affects the market interest rate on a bond. The - Select time, and it tends to get -Select- when the economy is weaker and borrowers are more likely to have a hard time paying off their debts. A liquid asset can be converted to cash quickly at a "fair market value." Real assets are generally -Select- v liquid than financial assets, but different financial assets vary in their liquidity. Assets with higher trading volume are generally -Select- The average liquidity premium varies over time. liquid. The prices of long-term bonds -Select- ~ whenever interest rates rise. Because interest rates can and do occasionally rise, all long-term bonds, even Treasury bonds, have an element of risk called - Select rate risk. Therefore, a -Select- risk premium, which is higher the longer the term of the bond, is included in the required interest rate. While long-term bonds are heavily exposed to -Select rate risk, short-term bills are heavily exposed to -Select- risk. Although investing in short-term T-bills preserves one's - Select the interest income provided by short-term T-bills is -Select- stable than the interest income on long-term bonds