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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: Characteristic
Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic:
Characteristic | Component | Symbol |
---|---|---|
This is the premium added as a compensation for the risk that an investor will not get paid in full. | ||
This is the premium added to the equilibrium interest rate on a security that cannot be bought or sold quickly enough to prevent or minimize loss. | ||
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. | ||
This is the rate for a short-term riskless security when inflation is expected to be zero. | ||
This is the rate for a riskless security that is exposed to changes in inflation. | ||
Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. |
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