Risk premium

• The amount by which the required discount rate for a project exceeds the risk-free rate; or, the additional coupon interest investors will demand based on the risk of the issuer and of the debt issue itself.

• Risk Premium is the explicit amount added to the base rate to cover default and other risks. Hence, a loan might be quoted as 6-month LIBOR plus 150 basis points, which means that the interest due will start out at the current LIBOR plus 150bp. Each basis point is one-one hundredth of a percent. After 6 months, the interest rate will be revised to the LIBOR in effect at that time plus 150bp.

• The reward for holding the risky market portfolio rather than the risk-free asset. The spread between Treasury and non-Treasury bonds of comparable maturity.


Follow this link for all the terms related to risk.

 Embedded terms in definition
Base rate
Basis point
Discount rate
Interest rate
Market portfolio
Treasury bond
 Related Terms
Affiliate risk
Bankruptcy risk
Basis risk
Business and industry risk
Business risk
Call premium
Call risk
Commercial risk
Company specific risk
Completion risk
Conversion premium
Counterparty risk
Country economic risk
Country financial risk
Country risk
Country risk analysis models
Credit risk
Cross border risk
Currency risk
Currency risk sharing
Default premium
Default risk
Diversifiable risk
Economic risk
Equilibrium market price of risk
Event risk
Exchange rate risk
Exchange rate risk capital budgeting
Exchange risk
Fallout risk
Financial risk
Firm specific risk
Flat price risk
Force majeure risk
Forecasting risk
Foreign exchange fx risk
Foreign exchange risk
Forward premium
Funding risk
Geographic risk
Herstatt risk
Idiosyncratic risk
Inflation risk
Insolvency risk
Interest rate risk
Interest rate risk management
Liquidity premium
Liquidity risk
Macro political risk
Market premium convertible securities
Market price of risk
Market risk
Market risk return function
Micro political risk
Mortality risk
Mortgage pipeline risk
Nondiversifiable risk
Nonsystematic risk
Operating risk
Operational risk
Option premium
Overnight delivery risk
Pin risk
Political risk
Premium bond
Premium for bonds
Prepayment risk
Price risk
Product risk
Purchasing power risk
Rate risk
Regulatory pricing risk
Reinvestment risk
Residual risk
Reverse price risk
Risk adjusted discount rate
Risk adjusted profitability
Risk adjusted return
Risk arbitrage
Risk arrays
Risk averse
Risk capital budgeting
Risk classes
Risk controlled arbitrage
Risk free asset
Risk free rate
Risk indexes
Risk indifferent
Risk lover
Risk management
Risk management document
Risk neutral
Risk of technical insolvency
Risk premium approach
Risk prone
Risk return tradeoff
Risk reversal
Risk seeking
Risk transformation
Risk types
Riskless or risk free asset
Settlement risk
Shortfall risk
Single premium deferred annuity
Sovereign risk
Specific risk
Systematic risk
Systematic risk principle
Tender offer premium
Theta risk
Time premium
Total risk
Undiversifiable risk
Unique risk
Unsystematic risk
Value at risk
Value at risk model
Vega risk
Volatility risk
Warrant premium

<< Risk of technical insolvency Risk premium approach >>

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