The risk-free interest rate is composed of:
A) an inflation premium and a default risk premium
B) a default risk premium and a maturity risk premium
C) a real rate of interest and a liquidity premium
D) a real rate of interest and an inflation premium

Question

Quizplus · Accepted Answer

The risk-free interest rate is typically composed of a real rate of interest and an inflation premium. This is because the "risk-free" rate is typically defined as the rate on a Treasury bond, which is considered to have no default risk. However, the rate on the Treasury bond will still have inflation expectations factored in, and thus the need for an inflation premium.

The Risk-Free Interest Rate Is Composed Of