A market interest-rate model

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A basic interest rate pricing model for an asset

Assuming perfect information, pe is the same for all participants in the market, and this is identical to:

where

i_n is the nominal interest rate on a given investment

i_r is the risk-free return to capital

i*_n = the nominal interest rate on a short-term risk-free liquid bond (such as U.S. Treasury Bills).

rp = a risk premium reflecting the length of the investment and the likelihood the borrower will default

lp = liquidity premium (reflecting the perceived difficulty of converting the asset into money and thus into goods).