Editing Interest rate (section)

===A market model===
A basic interest rate pricing model for an asset is

: <math>i_n = i_r + p_e + r_p + l_p\,\!</math>

where

: ''i<sub>n</sub>'' is the nominal interest rate on a given investment
:''i<sub>r</sub>'' is the risk-free return to capital
: ''i*<sub>n</sub>'' is the nominal interest rate on a short-term risk-free liquid bond (such as U.S. [[treasury bill]]s).
: ''r<sub>p</sub>'' is a risk premium reflecting the length of the investment and the likelihood the borrower will default
: ''l<sub>p</sub>'' is a liquidity premium (reflecting the perceived difficulty of converting the asset into money and thus into goods).
: ''p<sub>e</sub>'' is the expected inflation rate.

Assuming perfect information, ''p<sub>e</sub>'' is the same for all participants in the market, and the interest rate model simplifies to

: <math>i_n = i^*_n + r_p + l_p\,\!</math>