Taking a firm for an example, when it raises funds, it is conventional to pay higher interest rates than those of safe assets such as government bonds. That is because fund providers request adding interest rates worth the factors such as a firm’s default risk.
The interest rates on safe assets are called risk-free interest rates and the additional interest rates are called risk premiums. The added interest rates depend on the probability of a firm’s default as well as to what extent fund providers’ want to avoid risk, namely, the degree of risk aversion.