Question

2. Determinants of market interest rates

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
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 on a Treasury bill or a Treasury bond.
This is the premium added as a compensation for the risk that an investor will not get paid in full.
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.
This is the rate on short-term US Treasury securities, assuming there is no inflation.
This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value.

Answer 1

Characteristic	Component	Symbol
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 on a Treasury bill or a Treasury bond.	Nominal yield	Rrf
This is the premium added as a compensation for the risk that an investor will not get paid in full.	Default risk premium	DRP
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
This is the rate on short-term US Treasury securities, assuming there is no inflation.	Real risk free rate	r*
This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value.	Liquidity premium	LP