Characteristic

Component

Symbol

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 is the rate on a Treasury bill or a Treasury bond.

It is based on the bond$$s rating; the higher the rating, the lower the premium added, thus lowering the interest rate.

This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value.

As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty.

This is the premium added to the risk$-$free rate that reflects the average sustained increase in the general level of prices for goods and services expected over the security$$s entire life.