Risk premium - Financial definition
Financial acronyms
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Concise definition of the term risk premium
Yield pick-up offered by an investment deemed risky in comparison to the yield offered by an investment considered risk-free and which possesses otherwise equivalent characteristics. The risk premium represents the reward to the investor for assuming the additional risk. The higher the risk, the higher the risk premium will be.
Comprehensive definition of the term risk premium
Example:
Consider a liquid, 5-year corporate bond with a yield of 2.5% and a government bond with the same maturity and a yield of 1.8%. Here, the corporate bond is said to pay a risk premium of 0.7 percentage points, or 70 basis points (bp).
Consider a liquid, 5-year corporate bond with a yield of 2.5% and a government bond with the same maturity and a yield of 1.8%. Here, the corporate bond is said to pay a risk premium of 0.7 percentage points, or 70 basis points (bp).