The interest rate is composed of _____ and the ______?

a. risk-free rate,risk discount
b.risk free rate, risk premium
c.risk free rate, default risk premium
d. none of the above

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To determine the answer to this question, we need to understand what components make up the interest rate. Generally, an interest rate is composed of the risk-free rate and a risk premium.

The risk-free rate refers to the theoretical interest rate on an investment that has no risk associated with it. It can be seen as the baseline or minimum return that an investor would expect from an investment that carries no risk. This rate is typically based on the yield of a risk-free asset, such as a government bond.

On the other hand, the risk premium is an additional return that investors demand for taking on additional risk. This premium compensates investors for the possibility of not receiving their full investment or the expected return due to factors such as default risk, market volatility, or uncertainty about future cash flows.

Based on the options provided, the correct answer is option b. The interest rate is composed of the risk-free rate and the risk premium. Option c seems similar, but it specifically mentions a "default risk premium," which is only one type of risk premium and doesn't account for other sources of risk. Therefore, option b is the most accurate choice.