Characteristic

This is the rate on short$-$term U$.$S$.$ Treasury securities$,$ assuming there is no inflation.

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

This is the premium added to the real risk$-$free rate to compensate for a decrease in

purchasing power over time.

This is the premium added as a compensation for the risk that an investor will not get paid

in full.

This premium is added when a security lacks marketability, because it cannot be bought

and sold quickly without losing value.

As interest rates rise over time, bond prices fall, and as interest rates fall, bond prices

rise. Because interest rate changes are uncertain over the life of the security, this

premium is added as a compensation for this uncertainty.