Final answer:
An interest rate is interpreted as a required rate of return or the opportunity cost of consumption, reflecting both the return on alternative investments and a risk premium for perceived risks.
Step-by-step explanation:
An interest rate can best be interpreted as C) a required rate of return or the opportunity cost of consumption. This is because a financial investor, when deciding on the appropriate interest rate to evaluate future payments, considers both the return rate on alternative investments (which are the opportunity costs of capital) and incorporates a risk premium for investments that appear especially risky. For example, if an investor selects a 15% interest rate, this reflects the competitive rate of return from other opportunities as well as an additional risk component if the investment is considered to carry higher risk.
An investor buying a bond is looking for a return that can be broken down into compensation for delaying consumption, an adjustment for inflation, and a risk premium that accounts for the borrower's risk level. In essence, the interest rate amalgamates these factors, including expected rate of return, compensating for various risks like default or interest rate risk, and the actual rate of return that the investor will achieve over time.