Final answer:
The interest rate used to determine the interest on the liability component of pension expense is the discount rate.
Step-by-step explanation:
The interest rate used to determine the interest on the liability component of pension expense is the discount rate. The discount rate is the rate at which future pension liabilities are discounted to their present value. It reflects the rate of return on other available financial investment opportunities, the opportunity cost of investing financial capital, and a risk premium that considers the borrower's riskiness.
For example, if the discount rate is 5%, it means that future pension liabilities are being discounted at a rate of 5% to determine their current value.