The nominal rate of interest is equal to the real rate of interest plus an inflation premium plus the default risk premium plus the maturity risk premium plus the liquidity risk premium.

Question

Quizplus · Accepted Answer

This statement is true. The nominal rate of interest is composed of various premium components, including the real rate of interest (which is the base rate of borrowing), an inflation premium (added to compensate for expected inflation), a default risk premium (added to compensate for the risk of default on the loan), a maturity risk premium (added to compensate for the risk of changes in interest rates over the life of the loan), and a liquidity risk premium (added to compensate for lack of marketability or ease of access to the investment).

The Nominal Rate of Interest Is Equal to the Real