Interest Rates and Premiums: Real, Nominal, and Yield Curve Analysis

Real rates

Interest rates or rates of return that have been adjusted for inflation.

Nominal rates

Interest rates or rates of return that have not been adjusted for inflation.

Fisher effect

The relationship between nominal returns, real returns, and inflation.

Term structure of interest rates

The relationship between nominal interest rates on default-free, pure discount securities and time to maturity; that is, the pure time value of money.

Inflation premium

The portion of a nominal interest rate that represents compensation for expected future inflation.

Interest rate risk premium

The compensation investors demand for bearing interest rate risk.

Treasury yield curve

A plot of the yields on Treasury notes and bonds relative to maturity.

Default risk premium

The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.

Taxability premium

The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.

Liquidity premium

The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity.