MANAGEMENT

Detailed explanation-1: -An asset’s risk premium is a form of compensation for investors. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset. Similarly, the equity risk premium refers to an excess return that investing in the stock market provides over a risk-free rate.

Detailed explanation-2: -What is a Default Risk Premium? A default risk premium is effectively the difference between a debt instrument’s interest rate and the risk-free rate. The default risk premium exists to compensate investors for an entity’s likelihood of defaulting on their debt.

Detailed explanation-3: -Default risk premium – This is the additional maturity risk premium paid by a borrower to account for the risk that the borrower defaults and does not pay back the money loaned. Most corporations are charged a default risk premium.

Detailed explanation-4: -The default risk premium is essentially the anticipated return on a bond minus the return a similar risk-free investment would offer. To calculate a bond’s default risk premium, subtract the rate of return for a risk-free bond from the rate of return of the corporate bond you wish to purchase.