Characteristic

It is calculated by adding the inflation premium to $r^{**}.$

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.

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$\text{'}$s

entire life.

It is based on the bond's rating; the higher the rating, the lower the premium added, thus

lowering the interest rate.

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.

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.