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There is probably not a single answer to this question. It will depend on the particular economic theory you are using. 1) Here a theory using 5 components: "In financial theory, the rate of return at which an investment trades is the sum of five different components. They are: 1. The Real Risk-Free Interest Rate: This is the rate to which all other investments are compared. It is the rate of return an investor can earn without any risk in a world with no inflation." "2. An Inflation Premium: This is the rate that is added to an investment to adjust it for the market’s expectation of future inflation." "3. A Liquidity Premium: investors are not going to pay the full value of the asset if there is a very real possibility that they will not be able to dump the stock or bond in a short period of time because buyers are scarce. This is expected to compensate them for that potential loss." "4. Default Risk Premium: How likely do investors believe it is that a company will default on its obligation or go bankrupt? Often, when signs of trouble appear, a company’s shares or bonds will collapse as a result of investors demanding a default risk premium." "5. Maturity Premium: The further in the future the maturity of a company’s bonds, the greater the price will fluctuate when interest rates change. That’s because of the maturity premium." Source and further information: http://beginnersinvest.about.com/od/investing101/a/aa040407a.htm 2) Here a theory with 3 key factors: "There are several factors which influence how much money you will pay in interest for a loan. However there are three major influences: the federal reserve discount interest rate, FISCO score and credit report, and lender business factors." Source and further information: http://ezinearticles.com/?Interest-Rate-Determination:-Three-Key-Factors&id=228422
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