Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. Equilibrium in the flow of funds between savers and bor-rowers produces the interest rate or required return. Most interest rates are ex-pressed in nominal terms. The nominal interest rate represents the rate at which money grows over time, whereas the real interest rate represents the rate at which purchasing power grows over time. The difference between the nominal rate and the real rate is (approximately) the inflation rate (or the expected infla-tion rate). For risky assets, the nominal interest rate is the sum of the risk-free rate and a risk premium reflecting issuer and issue characteristics. The risk-free rate is the real rate of interest plus _an inflation premium. For any class of similar-risk bonds, the term structure of interest rates is the relation between the rate of return and the time to maturity. Yield curves plot this relation on a graph and can be downward sloping (inverted), upward sloping (normal), or flat. The expectations theory, liquidity preference theory, and market segmentation theory offer different explanations of the shape of the yield curve. Risk premiums for non-Treasury debt issues result from de-fault or credit risk and other features such as maturity and exposure to interest rate risk.