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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
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 for a short-term riskless security when inflation is expected to be zero. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time. It is calculated by adding the inflation premium to r*. 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 US Treasury bond and a corporate bond of the same profilethat 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
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