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    Nasef Mohd
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    The quoted interest rate on a security is equal to the real risk-free rate plus premiums for inflation, default risk, liquidity, and maturity risk. The real risk-free rate is the hypothetical rate that would exist without expected inflation, while the inflation premium reflects average expected future inflation. Additional premiums are included to account for the possibility of default and the difficulty of immediately converting the security to cash at a fair price based on its liquidity and maturity.

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    The quoted interest rate on a security is equal to the real risk-free rate plus premiums for inflation, default risk, liquidity, and maturity risk. The real risk-free rate is the hypothetical rate that would exist without expected inflation, while the inflation premium reflects average expected future inflation. Additional premiums are included to account for the possibility of default and the difficulty of immediately converting the security to cash at a fair price based on its liquidity and maturity.

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    Download as PPTX, PDF, TXT or read online from Scribd
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    5 views1 page

    FIOn

    Uploaded by

    Nasef Mohd
    The quoted interest rate on a security is equal to the real risk-free rate plus premiums for inflation, default risk, liquidity, and maturity risk. The real risk-free rate is the hypothetical rate that would exist without expected inflation, while the inflation premium reflects average expected future inflation. Additional premiums are included to account for the possibility of default and the difficulty of immediately converting the security to cash at a fair price based on its liquidity and maturity.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
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    Quoted interest rate = r=r*+IP+DRP+LP+MRP

    r= the quoted or nominal rate of interest on a given security. There are many different securities. r*= the real risk free rate of interest. It is pronounced r-star and it is the rate that would exist on a riskless security if zero inflation were expected. IP= Inflation premium. It is equal to the average expected future inflation rate is not necessarily equal to the current inflation rate. rRF =r* +IP . It is quoted risk free rate of interest on a security such as US DRP= default risk premium. Premium reflects the possibility that the issuer will not pay interest or principal at the stated time and in stated amount. LP = Liquidity or marketability, premium This is a premium charged by lenders to reflect the fact that some securities cannot be converted to cash on short notice at a reasonable price. MRP= Maturity risk premium. These are charged by lenders to reflect this risk.

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