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Ok, this is my own question. This is what I came up with. can anyone confirm or correct?

Maturity r = RR + IP

1-YEAR 2.25% = 1.5% + X

2.25% - 1.5% = .75%

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What are the determinants of market interest rates?

rd - Quoted or nominal rate of interest on a given security. there are many different securities, hence many different quoted interest rates.r* - real risk-free rate of interest, which represents the rate that would exist on a riskless security if zero inflation were expected.IP - Inflation premium is equal to the average expected inflation rate over the life of the security. The expected future inflation rate is not necessarily equal to the current inflation rate, so IP is not necessarily equal to current inflation.rRF - r* + IP and it is the quoted risk-free rate of interest on a security such as U.S. Treasury bill, which is very liquid and also free of most risks.DRP - default risk premium reflects the possibility that the issuer will not pay interest or principal at the stated time and in the stated amount. DRP rises as the riskiness of issuers increases.LP - Liquidity premium that is charged by lenders to reflect the fact that some securities can't be converted to cash on short notice at "reasonable" price. LP is very low for Treasury securities and for securities issued by large strong firms, but it is relatively high on securities issued by small firms.MRP - Maturity risk premium is charged by lenders to reflect the risk of price declines.


Other things remain constant if the expected inflation rate decreases and investors also become more risk averse the security market line would shift?

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Related Questions

What are the determinants of market interest rates?

rd - Quoted or nominal rate of interest on a given security. there are many different securities, hence many different quoted interest rates.r* - real risk-free rate of interest, which represents the rate that would exist on a riskless security if zero inflation were expected.IP - Inflation premium is equal to the average expected inflation rate over the life of the security. The expected future inflation rate is not necessarily equal to the current inflation rate, so IP is not necessarily equal to current inflation.rRF - r* + IP and it is the quoted risk-free rate of interest on a security such as U.S. Treasury bill, which is very liquid and also free of most risks.DRP - default risk premium reflects the possibility that the issuer will not pay interest or principal at the stated time and in the stated amount. DRP rises as the riskiness of issuers increases.LP - Liquidity premium that is charged by lenders to reflect the fact that some securities can't be converted to cash on short notice at "reasonable" price. LP is very low for Treasury securities and for securities issued by large strong firms, but it is relatively high on securities issued by small firms.MRP - Maturity risk premium is charged by lenders to reflect the risk of price declines.


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Other things remain constant if the expected inflation rate decreases and investors also become more risk averse the security market line would shift?

Ask Prof. U Reinh


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The cast of Huo bing - 1971 includes: Hua Chung as Hua Tieh Erh Hsiao Chung Li as Treasury Manager Chun Erh as Treasury Security Guard Wei Hu as Waiter Wei Lieh Lan as Treasury Security Guard Ivy Ling Po as Meng Yu Yen Chun Liu as Butler Wang Fu Han Lo as Treasury Proprietor Kong Lung as Treasury Security Guard Hung Yueh as Waiter


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