The required interest rate on any security is composed of what plus a risk premium?

The required interest rate on any security is fundamentally based on the risk-free rate of interest, which represents the return on an investment with no risk of financial loss. This serves as the baseline rate for all securities, taking into account that investors will generally expect to earn at least this minimum return to compensate for the time value of money.

The risk premium is then added to the risk-free rate to account for the additional risk associated with the specific security. Different securities carry varying degrees of risk, influenced by factors such as credit risk, market volatility, and potential liquidity issues. The risk premium effectively compensates investors for taking on this extra risk above what they would receive from a risk-free investment.

In summary, the composition of the required interest rate includes the risk-free rate as a foundational element, with a subsequent risk premium adding to it in accordance with the particular risks associated with the investment.