Determinants of market interest rates Aa Aa 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 rate on a Treasury bill or a Treasury bond. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. This is the difference between the interest rate on a US Treasury bond and a corporate bond of the same profile—that is, the same maturity and marketability. This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time.