Canadian Securities Course (CSC) Level 1 Practice Exam

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What is the primary factor that influences interest rates due to default risk levels?

Decrease in interest rates to encourage borrowing
Increased government spending
Higher interest rates demanded by lenders with greater default risk
Government bailouts

The correct answer is: Higher interest rates demanded by lenders with greater default risk

The primary factor that influences interest rates due to default risk levels is the higher interest rates demanded by lenders with greater default risk. When lenders perceive that there is a higher risk of default on a loan, they will typically require a higher interest rate to compensate for this increased risk. This is known as the risk premium, and it reflects the additional return that lenders require to be willing to lend money to riskier borrowers. Options A, B, and D do not directly relate to the concept of default risk influencing interest rates.