Question

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.

Answer 1

Characteristic	Component	Symbol
This is the premium added as a compensation for the risk that an investor will not get paid in full.	Default Risk Premium	DRP
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.	Liquidity Premium	LP
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.	Maturity risk premium	MRP
This is the rate for a short-term riskless security when inflation is expected to be zero.	Real Risk free Rate	r*
This is the rate for a riskless security that is exposed to changes in inflation.	Nominal Yield	Rrf
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.	Inflation premium	IP