7. Determinants of market interest ratesSome characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic:CharacteristicComponentSymbolThis 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 premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. It is calculated by adding the inflation premium to r*. 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. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate.

Interest payment refers to the compensation provide to the lenders in order to give up their present…

Answered: Some characteristics of the…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: Savings,investment And The Financial System

Section: Chapter Questions

Problem 6PA

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7. 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
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 premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value.
It is calculated by adding the inflation premium to r*.
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.
It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the interest rate.

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