The default risk premium is
A)relevant only for securities issued by very small companies.
B)the additional yield a saver requires for holding a risky instrument.
C)zero for corporate bonds, but quite substantial for corporate stock.
D)constant across the business cycle.

Question

Quizplus · Accepted Answer

The default risk premium is the additional yield that investors demand to hold a risky instrument like a corporate bond, reflecting the likelihood of default on the part of the borrower. It is relevant for any instrument with default risk, and not just for securities issued by small companies. Its magnitude can vary depending on the creditworthiness of the borrower and prevailing economic conditions, and is not constant across the business cycle. For example, in times of economic expansion and lower unemployment, default risk may be perceived to be lower and the default risk premium may be correspondingly lower.

The Default Risk Premium Is