Characteristic

Component

Symbol

It is based on the bond$$s marketability and trading frequency; the less frequently the security is traded, the higher the premium added, thus increasing the interest rate.$$It is based on the bond$$s rating; the higher the rating, the lower the premium added, thus lowering the interest rate.$$It is calculated by adding the inflation premium to r$*.$This is the rate for a short$-$term riskless security when inflation is expected to be zero.$$As interest rates rise, bond prices fall, and as interest rates fall, bond prices rise. Because interest rate changes are uncertain, this premium is added as a compensation for this uncertainty.$$This is the premium added to the real risk$-$free rate to compensate for a decrease in purchasing power over time.$$