The difference between the risk-free rate and the interest rate a particular investor has to pay is called the:
A) credit risk.
B) risk premium.
C) default rate.
D) interest rate arbitrage.

Question

Quizplus · Accepted Answer

The risk-free rate is the rate of return an investor can expect from an investment that carries no risk, such as a government bond. The interest rate a particular investor has to pay depends on their creditworthiness and the risk associated with the investment. The difference between the risk-free rate and the interest rate a particular investor has to pay is called the risk premium, which compensates the investor for taking on more risk. Therefore, the correct answer is B: risk premium.

The Difference Between the Risk-Free Rate and the Interest Rate