Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates?
I. liquidity premium
II. real rate
III. interest rate risk premium
IV. inflation premium
A)I and II only
B)II and III only
C)III and IV only
D)II, III, and IV only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

The nominal interest rate on default-free securities, according to the modern view of the term structure of interest rates, includes the real rate, interest rate risk premium, and inflation premium. These components reflect the compensation for delaying consumption (real rate), the risk of interest rate changes (interest rate risk premium), and the expected loss of purchasing power due to inflation (inflation premium).

Which of the Following Comprise the Nominal Interest Rate on Default-Free