Question
Maria is a professional tennis player, and your firm manages her money. She has asked you to give her information about what determines the level
Maria is a professional tennis player, and your firm manages her money. She has asked you to give her information about what determines the level of various interest rates. Your boss has prepared some questions for you to consider. 1. Can you suggest the fundamental factors that typically affect the cost of money, or the level of interest rates in the economy? What are other factors we should also take into consideration? 2. Consider the terms inflation premium (IP), default risk premium (DRP), liquidity premium (LP), and maturity risk premium (MRP). Please describe how these premiums determine the interest rate on (1) short-term U.S. Treasury securities, (2) long-term U.S. Treasury securities, (3) short-term corporate securities, and (4) long-term corporate securities. Also, explain how the premiums would vary over time and among the different securities listed.
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